Annual Report 2006

CONTENTS
Corporate Information Vision & Mission Stateme nts Notice of Meeting Directors Report to Shareholders Six Years Summary of Financial Results Statement of Ethics and Business Practices Statement of Compliance with CCG Auditors Review Report on Statement of Compliance with CCG Auditors Report to Members Balance Sheet Profit & Loss Account Cash Flow Statement Statement of Changes in E quity Notes to the Accounts Pattern of Shareholdin g Pattern of Shareholdin g as per CCG Proxy Form
PAGES 3 4 5 12 17 20 22 24 25 26 27 28 30 31 63 65 67
CORPORATE INFORMATION
BOARD OF DIRECTORS Mr. Muhammad Siddique Khatri Mr. Abdul Ghafoor Khatri Mr. Abdul Sattar Khatri Mr. Abdul Aziz Khatri Mr. Mansoor Ahmed Khatri Ms. Farhana Sattar Mr. Fawad Yousuf Mr. Mansoor Ahmed Mr. Abdul Sattar Khatri Mr. Mohammad Siddique Mr. Javed Iqbal Mr. Noor Zaman Khan 39-Empress Road, P.O. Box 1414, Lahore-54000. Tel : 042- 6306586 - 88 Fax : 042- 6365697 www.ittehadchemicals.com E-mail: info@ittehadchemicals.com G.T. Road, Kala Shah Kaku, District Sheikhupura. Ph : 042-7980026 - 28 Fax : 042-7990544 M/s. Corplink (Pvt.) Limited Corporate and Financial Consultants Wings Arcade, 1-K Commercial, Model Town, Lahore. Ph: 042-5839182 Fax: 042-5869037 Askari Commercial Bank Ltd Metropolitan Bank Ltd Muslim Commercial Bank Ltd Pakistan Industrial C redit & Investment Corpora tion Ltd Saudi Pak Industrial & Agricultu ral Investment Co. (Pvt.) Ltd Pak Libya Holding Co. (Pvt.) Ltd The Bank of Punjab Faysal Bank Ltd. United Bank Ltd KASB Bank Ltd. Union Bank Ltd Citi Bank M/s. BDO Ebrahim & Co., Chartered Accountan ts, 2nd Floor, Block-C, Lakson Square Bldg. No.1, Sarwar Shaheed Road, Karachi. Ph : 021-568 31 89 568 34 98 Fax : 021-568 42 39 M/s. Tahir Ali Tayebi & Co. 310, Marine Point, Schon Circle, Block 9, Clifton, Karachi. Ph : 021-537 04 58 Fax : 021-537 04 59 Chairman & Chief Executive Director Director Director Director Director Director Chairman Member Member
AUDIT COMMITTEE
CHIEF FINANCIAL OFFICER COMPANY SECRETRY REGISTERED OFFICE/HEAD OFFICE
PLANT
SHARE REGISTRARS
BANKERS TO THE COMPANY
AUDITORS
LEGAL ADVISORS
Our Vision
To be a sustainable and growth oriented Company who plays competitive role in industry and adds value to economy through excellence in technological advancement and quality products
Our Mission
The mission of Ittehad is to be
A Company built on sound financial f ootings that achieves excellent operating results thro ugh efficiency and cost control
A Company that consiste ntly benefits its stake holders through enhance d quality and profitability
A Company that achieves a high level of customer care service by providing quality products and positive feedback
A Company that provide s excellent working environment to its employees that assists in enhancing their strengths and abilities, create cultures that foster motivation and pr omote individual growth
A Company that contribu tes towards a good corporate citizenship and sets highest standards in serving the society
NOTICE OF ANNUAL GENERAL MEETING

Notice is hereby given that the 15th Annual General Meeting of Ittehad Chemicals Limited will be held at Registered Office of the Company at 39-Empress Road, Lahore, on October 31, 2006 at 11.30 a.m. to transact the following business: Ordinary Business 1. To confirm the minutes of the Extra Ordinary Ge neral Meeting held on Ju ne 19, 2006. 2. To receive, consider and adopt the Audited Accounts of the Company for the year ended June 30, 2006 together with the Directors Report to the shareholders and Auditors Report thereon. 3. To declare final dividend by way of issue of fully paid bonus shares @ 20% i.e. in the proportion of 20 shares for every 100 shares held by the members as recommended by the Board of Directors. 4. To appoint auditors to hold office till the conclusi on of next Annual General Meeting and to fi x their remuneration. Special Business Special Resolution No. 1 5. To consider and approve further equity investment of Rs. 8,400,000 in Chemi Chloride Industries Limited (CCIL), an associated company, under section 208 of the Companies Ordinance 1984 and to pass, with or without modification, the following resolutio n as special resolutio n; RESOLVED THAT pursuant to section 208 of the Companies Ordinance 1984, Ittehad Chemicals Limited [the Company] be and is hereby authorized to make further investment of Rs. 8,4 00,000 (Rupees eight million four hundred t housand only) in the equity of Chemi Chloride Industries Limited (CCIL), an associated Company, to increase its investment to Rs. 64,400,000 from Rs. 56,000,000 (Rupees fifty six million only) already approved by the shareholders in Extra Ordinary General Meeting of the Company held on June 19, 2006. ALSO RESOLVED that Mr. ABDUL SATTAR KHATRI, a Director of the C ompany, (hereinafter referred to as the Authorized Director) be and is hereby authorized do and cause to be done all such acts as are necessary to give effect to the above resolution.
Special Resolution No. 2 1. To consider and approve granting of a loan/advance upto Rs. 20,000,000 (Rupees twenty million only) to Chemi Chlor ide Industries Limited (CCIL), an assoc iated company, und er section 208 of the Companies Ordinance 1984 and to pass, with or without modifica tion, the following resolution as special resolution; RESOLVED that pursuant to section 208 of the Companies Ordinance 1984, Ittehad Chemicals Limited [the Company] be and is hereby authorized to grant a loan/advance upto a maximum limit of Rs. 20,000,000 (Rupees twenty million only) to Chemi Chloride Industries Limited (CCIL), an associated company; FURTHER RESOLVED that the above loan/advance will be made, as and when required, in the form of advances, loans and expenses on behalf of CCIL ; FURTHER RESOLVED that the return on outstanding balance of the loan/advance shall be accrued at the rate of not less than the weighted average borrowing cost of the Company prevailing on t he first day of the quarte r of financial year to whi ch the advance or loan so given or expenses so incurred relate to; FURTHER RESOLVED that the terms and conditions of the sa id loan/advance shall be those as stated in the statement of material facts circulated to the shareholders u/s 160(1) (b) of the Compan ies Ordinance 1984 along with the notice of thi s meeting. ALSO RESOLVED that Mr. ABDUL SATTAR KHATRI, a Director of the C ompany, (hereinafter referred to as the Authorized Director) be and is hereby authorized do and cause to be done all such acts as are necessary to give effect to the above resolution. 2. To transact any other business of the Company with the permission of the Chair.
By Order of the Board
NOOR ZAMAN KHAN Lahore: October 7, 2006 COMPANY SECRETARY
NOTES: 1. 2. The share transfer books of the Company will remain closed from October 28, 2006 to November 4, 2006 (both days inclusive). A member entitled to attend and vote at this meeting may appoint another member as his/her proxy to atte nd and vote instead of him/her. Proxies in order to be effec tive must be received at the Registered Office of the Company, not less than 48 hours before the time of meeting. 3. 4. A member whose name appears in the register of members at the close of business on October 27, 2006 will be entitled to bonus shares. In case of corporate entity, the board of directors resolution or power of attorney with specimen signature of the nominee shall be produced (unless it had been provided earlier) at the time of meeting. 5. Shareholders who have deposited their shares into Central Depository Company are advised to bring their National Identity Cards or Original Passports along with their CDC account numbers at the meeting venue to facilitate identification. 6. Shareholders are advised to immediately notify the change in their addresses, if any, to our registrar M/s. Corplink (Pvt.) Limited, Wings Arcade, 1-K commercial, Model T own, Lahore (Ph: 042-5839182, Fax: 042-5869037). STATEMENT UNDER SECTION 160 (1) (b) OF THE COMPANIES ORDINANCE, 1984 For Special Resolution No. 1 Ittehad Chemicals Limited (ICL) propose to invest a further sum of Rs. 8,400,000 (Rupees eight million four hundred thousand only) i n the equity of Che mi Chloride Industr ies Limited (CCIL), an associated Company, in addition to the sum of Rs. 56,000,000 (Rupees fifty six million) already invested as authorized by the share holders of the Company at the Extra-Ordinary General Meeting held on June 19, 2006, according to the following details: In statement of material facts circulated u/s 160(1)(b) of the Companies Ordinance 1984 along with the notice of Extra Ordinary General Meeting held on June 19, 2006 followed by an addendum to the said notice it was informe d to the shareholders of the Company that the budgeted capital cost of calcium chloride plant being set up by CCIL is Rs. 200.00 million and that the same will be financed
through mix of debt and equity in the ratio of 60:40. Thus the paid up capital of the Company will be Rs. 80.00 million (i.e. 40% of Rs. 200.00 million) whic h will be obtained from the f ollowing investors in lieu of issuance of shar es of Rs. 10/- each in the ratio given below:
Particulars Ittehad Chemicals Ltd. Janyvar BV Havelte, Netherlands Sponsors of CCIL Total
Ratio 70% 25% 5% 100%
Contribution (Rs.) 56,000,000 20,000,000 4,000,000 80,000,000
The budgeted capital cost of the CCIL project has been revisited by the management and the same has been revised to Rs. 230,000,000 from Rs. 200,000,000 and revised paid up capital of the Company will now be Rs. 92,000,000 (i.e. 40% of Rs. 230,000,000) which will be obtained from the following investors in lieu of issuance of shares of Rs. 10/- each in the same ratio given below:
Particulars Ittehad Chemicals Ltd. Janyvar BV Havelte, Netherlands Sponsors of CCIL Total
Ratio 70% 25% 5% 100%
Contribution (Rs.) 64,400,000 23,000,000 4,600,000 92,000,000
Thus Ittehad Chemicals Limited is making further investment of Rs. 8,400,000 in CCIL to make its share of contribution (i.e. 70%) according to revised paid up capital of CCIL as stated above. The proposed further investment will be made with in one year from the date of approval by shareholders of the Company i.e. date of AGM. Disclosures, other tha n the above information, as required under Section 208 of the Companies Ordinance 1984 and SRO 865(I)/2000 dated December 6, 2000 are the same as stated in statement of material facts circulated u/s 160(1)(b) of the Companies Ordinance 1984 along with the notice of Extra Ordinary General Meeting held on June 19, 2006 and are reproduced hereunder:
Sr. No.
I II III
Required Disclosure
Name of investee company or associated undertaking; Nature, amount and exte nt of investment; Average market price of the shares intended companies ; to be purchased during
Details
Chemi Chloride Industries Limited (CCIL) Further equity Investment of Rs. 8,400,000 making the total investment of Rs. 64,400,000 Not applicable; as CCIL is not a listed company.
preceding six months in case of listed IV Break-up value of shares intended to be purchased on the basis of last published financial statements; V VI VII VIII IX Price at which shares will be purchased; Earning per share of investee company in last three years; Source of funds from where shares will be purchased; Period for which investment will be made; Purpose of investment; CCIL will set up a Calcium Chloride Prill plant at Kala Shah Kaku to produce and sell Calcium Chloride, in all forms and grades, and other allied products. The main raw material for manufacture of Calcium Chloride is Chlorine as HCL (Hydro Choleric Acid) , which will be sold to CCIL by ICL. CCIL will be producing 40,000 Metric Tons (MT) of dry calcium chloride prills of 9498% per annum which will be exported, thus earning valuable foreign exchange for Pakistan. X Benefits likely to accrue to the company and the shareholders from the proposed investment; CCIL will purchase chlorine from ICL in the form of HCL thereby not only saving the neutralization cost being incurred by ICL but also generating extra revenue for ICL. Besides this ICL will also earn dividend income on its investment. XI Interest of directors and their relatives in the investee company; Directors have no interest in the above investment except to the extent of their holding in the investee company Rs. 10/- per share Earning per share is not available as the Company has not conducted any opera tion in last three years From own sources i.e. from Companys revenues from operations Long term investment for foreseeable future Rs. 10/- per share
For Special Resolution No. 2 Ittehad Chemicals Limited (ICL) propose to grant a loan/advance upto Rs. 20.00 million to CCIL. Disclosures as required under Section 208 of the Companies Ordinance 1984 and SRO 865(I)/2000 dated December 6, 2000 are as under, Sr. No.
I Names amount; II III Any loan or advance already provided or written-off; Brief about financial position of the investee companies Not applicable; no such loan or advance already provided or written off So for CCIL has not commenced any business operations and is about to set up its calcium chloride plant. Directors of the Company believe that the project will prove to be viable and the Company would gain healthy financial position. Brief financial position as per latest audited financial statements of the Company is as under: Particulars Preliminary expenses Current assets Total assets Paid up capital Advance for issue of shares Current liabilities IV Rate of mark up to be charged; 415,400 1,303,346 350,000 500,000 453,346 and preoperating Rupees 887,946
Required Disclosure
of associated companies or associated undertakings together with the
Details
Chemi Chloride Industries Limited; Maximum upto Rs. 20.00 million only
Not less than the weighted average borrowing cost of the Company prevailing on the first day of the quarter of financial year to which the advance or loan so given or expenses so incurred relate to.
Particulars of collateral security to be obtained from borrower or justification if not needed;
Not required because of the fact that CCIL is a partner with the Company to the JV Agreement approved by shareholders in EOGM held on Aug 10, 2005 and that both the companies are under common control.
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VI VII
Source of funds from where loan or advance will be given; Repayment schedule;
From revenues to be generated from operations of the Company. Entire outstanding balance including mark up thereon as appearing in the Companys books of account will be recovered from time to time and in any case before closing of the financial year of the Company.
VIII
Purpose of loans and advances;
CCIL is going to be subsidiary of the Company and will be operated in the same industry as of the Company. Besides this both the Companies are situated in the same vicinity. Some of the items of raw material, stores, spares and services that would be required by CCIL are the same as are acquired and used by the Company presently. For ease of business operations and efficiency involved, the Board recommends to debit the account of CCIL against supply of such items, advances, loans, and expenses etc on as and when required basis.
IX
Benefits likely to accrue to the company and the shareholders from the loans and advances;
The Company will receive mark up on the actual amounts advanced to CCIL at the rate which will not be less than the borrowing cost of the Company. Besides, growth in CCIL after installation of calcium chloride plant will benefit the Company and its shareholders in the form of dividend, sale of HCL and neutralization cost that will be saved from such sale.
Interest of directors and their relatives in the investee company;
Directors have no interest in the above investment except to the extent of their holding in the investee company.
11
DIRECTORS REPORT TO SHAREHOLDERS

The Directors feel pleasure in presenting their report together with Audited Accounts and Auditors Report thereon for the year ended June 30, 2006. The financial year 2005-06 was an eventful year for the Company as captive power plant and IEM expansion plant have been successfully got into operation. Besides this a strategic decision for investment in Calcium Chloride project was taken during the year and investment in the project is under way. Thus we achieved the implementation of our objectives set for improved performance in an orderly and phased manner. Operating and Financial results In the financial year under review, Company posted net sales revenue of Rs. 2.158 billion up by 13.40% from Rs. 1.903 billion in the previous year. This growth can be termed quite reasonable in view of highly competitive environment. Gross profit margin went up to 21.60% compared with 17.50% in last year, registering an increase of 23.30%. The rise is mostly attributable to increase in sales volume, power synergy due to Captive Power Plant, better product mix and close monitoring of factory overheads. Operating profit stood at Rs. 308.771 million as against Rs. 152.653 million, giving a rise of 102.27% as compared to previous year. Substantial increase of Rs. 156.118 million in this figure is partly due to provision of Rs. 56.250 million made in previous year accounts for diminution in value of investment. Had there been no such provision the increase in profit would have come to Rs. 99.868 million i.e. 47.81% improvement yet remarkable. Rise in pre tax profit has been 84.94% and 13.88% respectively with and without the impact of above stated provision. Growth in pre tax profit is not in line with profit from operations mainly due to higher finance cost resulting from hike in mark up rates in the market and increase in term financing as well as working capital requirements of the Company. After tax profit has been up by 136.70% as compared to previous year. Current tax liability has been computed on the basis of minimum tax payable u/s 113 of the Income Tax Ordinance 2001 in view of tax losses resulting from initial depreciation allowances claimed on additions to the plant and machinery during the year under review. Prior year tax credit has come from the tax refunds not initially acknowledged by tax authorities now recovered. Earning per share ha s increased to Rs. 3. 98 from Rs. 1.68 per share during the year un der review. Sales and Productions major contribution, i.e. 72.32%, in total sales revenue, both in current and previous years, has come from sale of Caustic Soda and Sodium Hypo Chlorite. The ratio of gross production of Caustic Soda at DSA and IEM plants has remained 51:49 as against 58:42 in last year. In order to earn maximum saving in power cost, management is implementing its strategy of producing the maximum quantity of caustic at IEM plant. Major raw materials and consumables such as rock salt, barium carbonate and mercury have seen sharp increase in their prices during the year under review which has resulted in adverse variance in raw material consumption. Increase in plant maintenance costs is primarily due to power shut downs by LESCO. Upward revision of Gas tariff b y 15.40% from January 01, 2006 has also affected the fuel and power expense. Other fixed and variable overheads have been closely monitored to achieve maximum gross margin. Freight expenses have increased on account of rise in sales volume and increase in transport fares. The Company has generated healthy operating cash flows of Rs. 542.296 million which have been utilized in financing capital expenditure,
12
servicing debt and meeting working capital requirements. This inflow has been mainly contributed by high profitability, income tax refunds and decrease in loans a nd advances. Advance tax paid or withheld during the year has been lower compared to previous year because of exemptions obtained from tax authorities, against deduction of tax at source, on the basis of tax l osses and refunds. Major portion of cash used in investing activities relates to capital expenditure incurred on IEM Expansion plant whereas payments made against term financing and finance cost formed the major part of cash outflow from financing activities. Captive Power Plant Captive Power Plant started supply of power to plants in September 2005. This has reduced reliance on WAPDA / Lahore Electric Supply Company in addition to cutting the production cost of Company products. Around 35% of the total power required for production processe s has been generated by the Company itself during the year under review Expansion IEM expansion plant started comme rcial production in the last quarter of the financial year under review. The 100 MT per day capacity plant has been installed in order to meet the increasing demand of Caustic Soda in the country. The project will result in increased production of caustic soda at relatively lower cost. Investment in Real Estate Your Company had made investment in real estate in order to earn profits on suitable sale deals in future. Calcium Chloride Project Project of Chemi Chloride Industries Limited (CCIL), an associated com pany, for producing 40,000 MT of Calcium Chloride per annum is under way. Initially CCIL project was based
on 100% equity financing and Company was to contribute its share of investment in CCIL through issuance of preference shares (PS issue). However the PS issue was cancelled in Extra Ordinary General Meeting held on June 19, 2006 on account of change of investors mind because of sharp development in mark up rates offered in the market. Due to cancellation of issuance of preference shares by the Company, Board of Directors of CCIL had resolved to finance the calcium chloride project through mix of debt and equity in the ratio of 60:40. In view of the foregoing, quantum of Companys investment in CCIL would be reduced which the Company would finance from its own resources. CCIL shall operate as a subsidiary of the Company and is expected to commence its operations in the beginning of financial year 2007-08. Outlook Looking ahead, given the present demand trend continues, we believe that the earnings in 2007 will be better than the current year. We will continue to focus on financial discipline and cost control, and expect to see further improvement in both price and volume. The Board and management have set the following targets for the financial year 2006-07: Achieving maximum production capacity at a minimum cost. Successful commissioning of Calcium Chloride project. Improve the financial performance of the Company.
We look forward to maintain strong relationships with our customers and other stakeholders of the Company. Overall we expect that financial year 2006-07 will be a good year for the Company. Appropriation of Profit Your Company believes in increasing shareholders wealth by retention of earnings
13
for investment in worthwhile projects. The Board of Directors of the Company has not recommended any cash dividend for the year under review in view of Companys plan for investment in Calcium Chloride project of CCIL, an associated company, as the Board believes that this investment would bring fruits for the shareholders in future. However, issuance of Bonus shares @ 20% has been recommended by the Board of Directors for the year under review. Statutory Payments Details of outstanding statutory dues are included in note No. 23 of the financial statements. Board of Directors The Board held seven (7) meetings during the year under review and attendance at meetings by each director remained as under: Names of Directors Meetings Attended 7 6 7 6 6 4 6
Summary of Financial Resu lts Summary of Financial Results for the last six years is annexed with this report. Auditors Present auditors M/s. BDO Ebrahim & Co., Chartered Accountants retire at the conclusion of coming Annual General Meeting and have offered themselves for reappointment. The Audit Committee recommends the appointment of M/s BDO Ebrahim & Co., as auditors of the Company for the year ending June 30, 2007. Pattern of Shareholding A statement of the Pattern of shareholding of the Company as on June 30, 2006 is included in this report together with additional information required under the reporting framework. The Directors, CEO, CFO, Company Secretary and their spouses and minor children had not carried out any trade in the shares of the Company during the year except as mentioned in the above statement. Compliance with the Code of Cor porate Governance The requirements of the Code of Corporate Governance set out in the Listing Regulations of Stock Exchanges in Pakistan have been duly complied with. A statement to this effect is annexed with this report. Corporate Governance The status of compliance with the Corporate and Financial Reporting requirements is as follows: 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.
Mr. M. Siddique Khatri Mr. Abdul Ghafoor Khatri Mr. Abdul Sattar Khatri Mr. Abdul Aziz Khatri Mr. Mansoor Ahmed Khatri Ms. Farhana Abdul Sattar Mr. Fawad Yousuf
Leave for absence was granted to those directors who could not attend the meetings. Audit Committee Audit Committee operates according to the terms of reference agreed by the Board of Directors of the Company. Four (4) meetings of Audit Committee were held during the year and there had been no change in the composition of the Committee. Provident Fund Value of investments of provident fund as per un-audited accounts of the Fund for the year ended on June 30, 2006 was Rs 2.208 million.
b.
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c.
Appropriate accounting policies have been consistently applied in preparation of these financial statements and accounting estimates are based on reasonable and prudent judgment. International Accounting Standards, as applicable in Pakistan, have been followed in preparation of financial statements and any departure there from has been adequately disclosed. The system of internal control is sound in design and has been effectively implemented and monitored. There are no significant doubts upon the Companys ability to continue as a going concern. There has been no material departure from the best practi ces of corporate governance, as detailed in the listing regulations.
d.
commissioning of the system. It is expected that the Company, after implementation of the system, would enjoy better control over business transactions and flow of data & information will take place in a manner better than before. Human Resources The Company is committed to the principle of equal opportunity in employment. Employment policies are fair and equitable, addressing the needs of the employees and the business. The Company has encouraged the participation of employees in training courses related to their area of work so as to keep them abreast with the latest work expertise and make them capable of meeting future business needs and challenges. The Directors would like to put on record their appreciation of the su stained efforts a nd cooperation of employees of the Company in maintaining the high levels of productivity throughout the year under review. Acknowledgement Thanks must go to our shareholders, valued customers, financial institutions and suppliers for their support a nd assistance. For and on behalf of the board
e.
f.
g.
Statement of Ethics and Business Practices The Board has developed and adopted the statement of ethics and business practices. All employees of the Company are informed of this statement and are required to observe the principles contained in it. Information Technology Your Company is committed to use best product available in the industry. Around two years back the Company started considering the implementation of ERP System and finally signed the agreement with Abacus Consulting (Pvt.) Limited in September 2006 for the acquisition of SAP Business One software as the Board believes that it is best suited to the present as well as future business requirements of the Company. The task of implementation is expected to commence in the mid of October 2006. The system will cover the areas such as finance, sales, and material management etc. The benefits of busine ss process auto mation would flow to the Compan y after successfu l
Muhammad Siddique Khatri Chairman and Chief Executive Lahore: October 7, 2006
15
Delegate Visits Plant Site
Signing Ceremony of SAP Business One Software
16
SIX YEARS SUMMARY OF FINANCIAL RESULTS

(Rupees in Million) 2006 Profit and loss account Net sales revenue Gross profit Operating profit Profit before tax Profit after tax Balance sheet Net operating fixed assets Capital work in progress Current assets Issued, subscribed and paid up capital Unappropriated profit Equity Redeemable capital (TFCs) Long term financing and morabaha Deferred liabilities Short term borrowings i ncluding current maturities Profitability ratios Gross profit Operating profit Profit after tax Return on equity Return on operating fixed assets Earning per share (rupees) Liquidity ratios Current ratio (times) Working capital Acid test (times) Leverage ratio Debt equity 2,158 465 309 167 120 2005 1,903 333 153 90 50 2004 1,514 228 130 88 45 2003 1,321 165 89 76 47 2002 1,307 181 107 96 53 2001 1,239 181 117 103 58
2,510 24 1,008 300 327 627 83 1,000 170 792
687 807 848 300 207 507 167 780 117 609
739 105 536 250 206 456 250 258 63 282
189 478 734 250 161 411 250 369 27 128
150 88 408 250 151 401 22 27 116
155 45 380 250 136 386 14 12 55
21.6% 14.3% 5.5% 39.8% 7.5% 3.98 0.97 (34) 0.54 64:36
17.5% 8.0% 2.7% 10.3% 7.1% 1.68 1.02 20 0.63 64:36
15.1% 8.6% 3.0% 11.6% 9.7% 1.51 1.21 92 0.79 51:49
12.5% 6.7% 3.6% 13.4% 27.7% 1.89 1.40 212 1.12 54:46
13.8% 8.2% 4.1% 15.3% 34.8% 2.11 1.30 95 0.86 1:99
14.6% 9.4% 4.7% 20.5% 37.9% 2.30 1.53 122 0.83 4:96
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Net Sales Rupees In Millions

2,500 2,158 2,000 1,514 1,903
500 450 400 350 300 181
Gross Profits Rupees In Millions

333
200 1,000 150 100 500 50 2001 2002 2003 Years 2004 2005 2006
2001
2002
2003 Years
165
1,239
181
1,500
1,307
1,321
250
2004
228
2005
2006
Operating Profit Rupees In Millions

350 309 300
180 160 140 120
Profit Before Tax Rupees In Millions
167
250 100 200 150 117 100 50 107 89 153 130 80 60 40 20
103 96 88 76 90
2001
2002
2003 Years
2004
2005
2006
2001
2002
2003 Years
2004
2005
2006
18
465
Profit After Tax Rupees In Millions

140 120 120 3.50 100 80 58 60 40 20 2001 2002 2003 Years 2004 2005 2006 53 47 45 50 3.00 2.50 2.00 1.50 1.00 0.50 2001 2002 2.30 2.11 4.50 4.00
Earning Per Share Rupees In Millions

3.98
1.89 1.51
1.68
2003 Years
2004
2005
2006
Operating Fixed Assets Rupees In Millions

3,000 2,510 2,500 2,000 1,500 1,000 500 600 700
Shareholders Funds Rupees In Millions
627 500 400 386 300 739 155 2001 189 2003 Years 2004 2005 2006 687 200 100 456 401 411 507
150 2002
2001
2002
2003 Years
2004
2005
2006
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STATEMENT OF ETHICS AND BUSINESS PRACTICES

Ittehad Chemicals Core Principles At the core of ICL are the values of integrity, honesty and respect for people, and our reputation is founded on these. The trust and confidence of those with whom we deal is a real asset, critical for achieving continued growth and success. Ittehad Chemicals Code of Conduct Business Integrity ICL insists on integrity, honesty and fairness in all aspects of our bu siness. All business transactions must be reflected accurately and fairly in ICLs accounts in accordance with established procedures. Our Commitment to Our Stakeholders We at ICL recognize our corporate responsibility to five main groups of stakeholders. We are committed: (a) To Shareholders We believe in honoring the trust, our investors place in us. We therefore have a responsibility to: Apply professional and diligent management in order to secure a fair and competitive return on our shareholders investment; Keep all the shareholders prudently informed regarding matters related to business; Conserve, protect, and increase the shareholders value of investment; Respect shareholders requests, suggestions, complaints, and formal resolutions.
(b) To Employees We believe in the dignity of every employee and in taking employee interests seriously. We therefore have a responsibility to: To provide and maintain safe conditions of work, with competitive terms a nd conditions of employme nt. Insist on a policy of diversity, by selecting, developing and retaining employees on the basis of ability and qualifications for the work to be performed, without a ny form of discrimination and prejudice. Encourage the involveme nt of employees in the pla nning and direction of their work.
(c) To Customers We believe in treating all customers with dignity. We therefore have a responsibility to: Win and retain customers by developing and providing products that offer value in terms of price, quality, safety and environmental impact. Be responsive to customer comments and complaints. Treat our customers fairly in all aspects of our business transactio ns
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(d) To Suppliers Our relationship with suppliers must be based on mutual trust and respect. We therefore have a responsibility to: Seek fairness and truthfulness in all our a ctivities; Ensure that our busines s activities are free from coercion; Foster long-term stability in the supplier relationship in return for value, quality, competitiveness and reliability; Seek, encourage and prefer suppliers whose employment practices respect human dignity.
(e) To the Community We conduct business as responsible corporate citizens, observe the laws of our country, give proper regard to the health, safety and the environment, a nd be sensitive to and supportive of our local cultural, social, educational and economic needs. Health, Safety and the Environment We have established safe and healthy working conditions for all our employees. To this end, we measure, appraise and report performance on the basis of continuous improvement and with the longer-term aim of enhancing t he sustainability of our b usiness and that of our customers and suppliers. Compliance, Monitoring and Reporting Compliance with this C ode is monitored and reviewed by the ICL Boar d, as part of its risk management process. Da y-to-day responsibility in this regard is delegated to senior operating management.
21
STATEMENT OF COMPLIANCE WITH THE CODE OF CORPORATE GOVERNANCE

This statement is being p resented to comply w ith the Code of Corporate Governance contained in listing regulation No. 3 7 of Karachi Stock Exchange 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 foll owing manner: 1. The Company encourages representation of independent non-executive directors on its Board of Directors. The board comprises 7 directors, including 4 independent non-executive directors, one of whom is chairman and chief executive of the board. 2. The directors have confirmed that none of them is serving as a director in more than ten listed companies including this Company. 3. 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 NBFI or being a member of a stock exchange has been declared as a defaulter by that stock exchange. 4. No casual vacancy occurred in the board during the year. 5. The Company has prepared a Statement of Ethics and Business Practices, which has been signed by all the directors and employees of the Company. 6. The Board has developed a vision & mission statement, overall corporate strategy and significant policies of the Compa ny. A complete record of par ticulars of significant policie s along with the dates on w hich they were approved or amended has been maintained. 7. All the powers of the Board have been duly exercised and decisions on material transactions, including appointme nt and determination of remuneration and terms and co nditions of employment of the CEO and other executive directors, have been taken by the Board. 8. The meetings of the Board were presided over by the Chairman and in his absence by a director elected by the Board for this purpose and the Board met at least once in every quarter. Written notices of the Board meetings, along with agendas and working pa pers, were circulated at least seven days before the meetings. The minutes of the meetings were appropriately recorded and circulated. 9. The Board members are well aware of their duties and responsibilities. 10. The CFO and Company Secretary were appointed pri or to the implementation of the Code of Corporate Governance. The remuneration and terms & conditions in case of future appointments on these pos itions will be approved by the Board. The Board authorized the Chief Executive of the Company to approve the appointme nt of Head of Internal Audit together with his remuneration and terms & conditions of employment.
22
11. 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. 12. The financial statements of the Company were duly endorsed by CEO and CFO before approval of the Board. 13. 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. 14. The Company has complie d with all the corporate a nd financial reporting requirements of the Code. 15. The Board has formed an Audit Committee. It comprises three members including the chairman of the committee who is a non-executive director. 16. Meetings of the audit committee were held at least once in 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. 17. The Board has set-up an effective internal audit function and personnel involved are considered suitably qualified and experienced for the purpose and are conversant with the policies and procedures of the company. 18. The statutory auditors of the Company have confirmed that they have bee n given a satisfactory rating under the quality control review program of the Institute of Chartered Accountants of Pakistan (ICAP), 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 ICAP. 19. 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. 20. We confirm that all other material principles contained in the Code have been complied with.
Muhammad Siddique Khatri Chairman and Chief Executive
Lahore: October 7, 2006
23
REVIEW REPORT TO THE MEMBERS ON STATEMENT OF COMPLIANCE WITH BEST PRACTICES OF CODE OF CORPORATE GOVERNANCE
We have reviewed the Statement of Compliance with the best practices con tained in the Code of Corporate Governance prepared by the Board of Directors of ITTEHAD CHEMICALS LIMITED to comply with the Listing Regulation No. 37 of the Karachi Stock Exchange.
The responsibility for compliance with the Code of Corpor ate Governance is that of the Board of Directors of the Compan y. Our responsibility is to review, to the extent where such compliance can be objectively verified, whether the Statement of Compliance reflects the status of the Companys compliance with the provision of the Code of Corpor ate Governance and report if it does not. A review is limited primarily to inquiries of the Company personnel and review of various documents prep ared by the Company to comply with the Code.
As part of our audit of the financial statements we are required t o obtain an understanding of the accounting and internal control systems s ufficient to plan the audit and develop an effective audit approach. We have not carried out any special review of the internal control syste m to enable us to express an opinion as to whether the Boards statement on internal control covers all controls and the effectiveness of such inter nal controls.
Based on our review nothing has come to our attention w hich causes us to believe that the Statement of Compliance does not appropriately reflect the C ompanys compliance, in all material respects, with the best practices contained in the Code of Corporate Governance as applicable to the Company for the year ended June 30, 2006
Place: KARACHI Dated: October 07, 2006
BDO Ebrahim & Co. Chartered Accountants
24
AUDITORS' REPORT TO THE MEMBERS

We have audited the annexed balance sheet of ITTEHAD CHEMICALS LIMITED as at June 30, 2006 and the related profit and los s account, cash flow statement and statement o f 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 Companys 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 conducted 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 above said statements. We believe that our audit provides a reasonable basis for our opinion and, after due verification, we report that: a) b) in our opinion, proper books of accounts have been kept by the Company as required by the Companies Ordinance, 1984; in our opinion: i) the balance sheet and profit and loss account togetherwith 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. 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;
ii) iii) 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 June 30, 2006 and of the profit, its cash flows and changes in equity for the year then ended; and in our opinion, no zakat was deductible at source under the Zakat and Ushr Ordinance, 1980.
d)
Place: KARACHI Dated: October 07, 2006
BDO Ebrahim & Co. Chartered Accountants
25
BALANCE SHEET
AS AT JUNE 30, 2006
Note ASSETS NON CURRENT ASSETS Property, plant and equipment Operating fixed assets Capital work in progress Long term investments Deferred cost Long term deposits CURRENT ASSETS Stores, spares and loose tools Stock in trade Trade debts Loans and advances Trade deposits and short term prepayments Other receivables Tax refunds due from Government Taxation - net Cash and bank balances TOTAL ASSETS EQUITY AND LIABILITIES SHARE CAPITAL AND RESERVES Authorized share capital 75,000,000 (2005: 75,000,000) shares of Rs. 10/- each Issued, subscribed and pai d up capital Reserves SURPLUS ON REVALUATION OF FIXED ASSETS NON CURRENT LIABILITIES Redeemable capital Long term financing Long term murabaha Deferred liabilities CURRENT LIABILITIES Trade and other payables Mark up accrued Short term borrowings Current portion of long term liabilities CONTINGENCIES AND COMMITMENTS TOTAL EQUITY AND LIABILITIES Note: The annexed notes form an integral part of these financial statements. 2006 2005 (Rupees in thousand)
3 4 5 6
2,510,171 24,156 2,534,327 1,817 1,751 14,658 2,552,553 301,796 144,617 201,342 21,572 5,205 2,177 5,974 67,550 257,713 1,007,946 3,560,499
686,562 807,334 1,493,896 341 2,601 14,658 1,511,496 274,793 92,759 171,516 118,800 4,198 8,964 59,968 75,773 80,831 887,602 2,399,098
7 8 9 10 11 12 13 14 15
16.1 16.2 17 18 19 20 21 22
750,000 300,000 326,839 626,839 638,574 83,266 739,251 261,187 169,921 1,253,625 221,094 28,520 431,977 359,870 1,041,461 3,560,499
750,000 300,000 206,849 506,849 166,533 592,820 187,500 117,154 1,064,007 201,683 18,025 359,397 249,137 828,242 2,399,098
23 24 25 26 27
Muhammad Siddique Khatri CHIEF EXECUTIVE Chief Executive
Abdul Sattar Khatri DIRECTOR Director
26
PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED JUNE 30, 2006
2006 Note Sales Cost of sales Gross profit Selling and distribution expenses General and administrative expenses Other operating expenses Other operating income Operating profit Financial charges Profit before taxation Taxation Profit after taxation Earnings per share - basic and diluted 37 35 34 30 31 32 33 28 29 2005
(Rupees in thousand) 2,157,767 (1,692,386) 465,381 (102,217) (56,422) (9,326) 11,355 (156,610) 308,771 (142,055) 166,716 (47,202) 119,514 1,902,864 (1,569,781) 333,083 (75,586) (47,597) (61,412) 4,165 (180,430) 152,653 (62,509) 90,144 (39,654) 50,490
Rs. 3.98
Rs. 1.68
Appropriations have been re flected in the statement of cha nges in equity. The annexed notes form an integral part of these financial statements.
Muhammad Siddique Khatri Chief Executive CHIEF EXECUTIVE
Abdul Sattar Khatri Director DIRECTOR
27
CASH FLOW STATEMENT FOR THE YEAR ENDED JUNE 30, 2006
2006 CASH FLOW FROM OPERATING ACTIVITIES Profit before tax Adjustments for items not involving movement of funds: Depreciation Provision for gratuity (Gain) / loss on sale of fixed assets Gain on sale of investment Gain on foreign exchange Amortization of deferred cost Provision for diminution in value of investment Provision for doubtful advanc es and deposits Provision for doubtful debts Advances and deposits written off Finance cost 151,281 451 (49) 850 326 3,108 142,055 464,738 Decrease / (Increase) in current assets Stores, spares and loose tools Stock in trade Trade debts Loans and advances Trade deposits and short ter m prepayments Other recievables Tax refunds due from Government Increase in current liabilities Trade and other liabilities Cash generated from opera tions Taxes paid Gratuity paid Net cash inflow from operating ac tivities 34,782 544,413 (1,696) (421) 542,296 50,202 65,867 (7,126) (117) 58,624 (27,003) (51,858) (32,399) 97,194 (1,299) 6,787 53,471 44,893 (129,485) (52,419) 32,691 (112,069) (334) (2,535) (9,761) (273,912) 76,837 358 (173) (243) (120) 850 56,250 544 1,889 732 62,509 289,577 166,716 90,144 2005
(Rupees in thousand)
28
2006 CASH FLOW FROM INVESTING ACTIVITIES Additions to operating fixed a ssets Less: Transfer from capital work in progress Transfer from leased to owned assets Additions to capital work in progress Proceeds from sale of fixed assets Long term investments Long term deposits Net cash outflow from investing activities CASH FLOW FROM FINANCING ACTIVITIES Repayment of redeemable capital Proceeds from long term financing Repayments of long term financing Proceeds from long term murabaha Repayments of long term murabaha Liabilities against assets subject to finance lease Finance cost paid Short term borrowings Net cash inflow from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year The annexed notes form an integral part of these financial statements. (83,267) 360,000 (166,649) 150,000 (12,500) (131,489) 72,580 188,675 176,882 80,831 257,713 (554,089) (1,336,357) 1,278,189 (58,168) (495,011) 90 (1,000)
2005
(Rupees in thousand)
(25,736) 1,807 1,283 (22,646) (702,494) 544 1,523 (2,696) (725,769)
(100) 500,000 (111,535) 200,000 (253) (48,783) 177,916 717,245 50,100 30,731 80,831
CHIEF EXECUTIVE
DIRECTOR
29
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED JUNE 30, 2006
Issued, subscribed and paid-up capital
Fair value reserve
Unappropriated profits
Total
( Rupees in thousand ) Balance as at July 01, 2004 Net profit for the year Fair value gain Issue of Bonus shares Balance as at June 30, 2005 Net profit for the year Fair value gain Balance as at June 30, 2006 250,000 50,000 300,000 300,000 167 166 333 476 809 206,026 50,490 (50,000) 206,516 119,514 326,030 456,193 50,490 166 506,849 119,514 476 626,839
Note: The annexed notes from an integral part ofof these financial statemets The annexed notes form an integral part these financial statements
CHIEF EXECUTIVE
DIRECTOR
Muhammad Siddique Khatri Chief Executive
Abdul Sattar Khatri Director
30
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2006
1 LEGAL STATUS AND NATURE OF BUSINESS Ittehad Chemicals Limited (the Company) was incorporated on September 28, 1991 to takeover the assets of Ittehad Chemicals and Ittehad Pesticides under a Scheme of Arrangement dated June 18, 1992 as a result of which the Company became a wholly owned subsidiary of Federal Chemical and Ceramics Corporation (Private) Limited. The Company was privatised on July 03, 1995 when 90% of the shares were transferred to the buyer.
The Company was listed on Karachi Stock Exchange on April 14, 2003 when sponsors of the Company offered 25% of the issued, subscribed and paid up shares of the Company to the general public. The registered office of the Company is situated at 39, Empress Road, Lahore. The Company is engaged in the business of manufacturing and selling caustic soda and other allied chemicals. The Company also deals in real esta te business. 2. 2.1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Statement of compliance These financial statements have been prepared in accordance with approved accounting standards as applicable in Pakistan and the requirements of Companies Ordinance 1984. Approved accounting standards comprise of such International Accounting Standards (IASs) as notified under the provisions of the Companies Ordinance, 1984. Wherever the requirements of the Companies Ordinance 1984 or directives issued by the Securities and Exchange Commission of Pakistan (SECP) differ with requirements of these standards, the requirements of Companies Ordinance, 1984 or the requirements of the said directives take precedence. Following amendments to existing standards have been published that are mandatory for the Company's accounting period s beginning on or after January 1 , 2006. Effective from IAS 1 Presentation of financial statements - Capit al disclosures IAS 19 (amendments) Employees Benefits IAS 39 Financial instruments: Recognition and measurement fair value option January 01, 2007 January 01, 2006 January 01, 2006
Adoption of the above amendments may only impact the extent of disclosures presented in the financial statements.
31
NOTES TO THE ACCOUNTS
2.2
ACCOUNTING CONVENTION These financial statements have been prepared under the historical cost convention except as modified by fair value adjustment in investments and exchange differences as referred to in notes 2.4 and 2.18 respectively. The preparation of financial statements in conformity with approved accounting standards requires management to make estimates, assumptions and use judgments that affect the effect application of policies and reported amount, of assets and liabilities and income and expenses. Estimates, assumptions and judgments are continually evaluated and are based on historical experience and other factors, including reasonable expectations of future events. Revisions to accounting estimates are recognized prospectively commencing from the period of revision.
Judgments and estimates made by the management that may have a significant risk of material adjustments to the financial statements in subsequent years are disclosed in note 36.
2.3
Property plant and equipment a) Operating fixed assets These are stated at cost / revalued amount less accumulated depreciation and accumulated impairment losses, if any, except capital work-in-progress which is stated at cost. Cost comprises of actual cost including, interest and charges and trial run operational results. Depreciation is charged on all fixed assets by applying the reducing balance method at the rates specified in note 3. Depreciation on assets is charged from the month of addition while no depreciation is charged for the month in which assets are disposed off. Maintenance and normal repairs are charged to income as and when incurred while cost of major replacements and improv ements, if any, are capita lized. Gains and losses on disposal and retirement of an asset are included in the profit and loss account. b) Capital work in progress Capital work-in-progress represents expenditure on fixed assets in the course of construction and installation . Transfers are made to relevant fixed assets category as and when assets are available for use . Capita l work-in-progress is stated at cost.
32

2.4 Investments Investment in associates Investment in associates where the Company holds 20% or more of the v oting power of the investee companies and wher e significant influence can be established are accounted for using the equity method . Investment in associates other than those described as above are classified as available for sale. In case of investments accounted for under the equity method, the method is applied from the date when significant influence is established until the date when that significant influence ceases. Available for sale investments These are initially measured at cost, being the fair value of consideration given. At subsequent reporting dates, these investments are re-measured at fair value. For listed securities, fair value is determined on the basis of period end bid prices obtained from stock exchange quotations, while for unquoted securities, fair value is determined considering break up value of securities. All purchases and sales of investments are recognized on the trade date which is the date that the Company commits to purchase or sell the investment. Cost of purchase includes transaction cost. Changes in carrying value are recognized in equity until the investment is sold or determined to be impaired at which time the cumulative gain or loss previously recognized in equity is included in p rofit and loss account for the yea r. 2.5 Deferred cost Expenses incurred on issue of Term Finance Certificates (TFCs) are amortized over a period of five years from the date of issue of TFCs. No further deferred cost has been included in these finanacial statements during the year in pursuance of the Securities and Exchange Commission of Pakistan circular number 01 of 2005 dated January 19, 2005. 2.6 Stores and spares These are valued at moving average cost except for items in transit, which are valued at cost comprising invoice value plus other charges paid thereon. Provision is made for slow moving and obsolete items. 2.7 Stock-in-trade These are valued at lower of cost and net realizable value. Cost is determined as follows: Raw and packing materials - Weighted average cost
33

Raw and packing materials in transit Work in process - Invoice value plus other expenses incurred thereon - Cost of material as above plus proportionate production overheads - Average cost of manufacture which includes proportionate production overheads including duties and taxes paid thereon, if any
Finished goods
Net realizable value represents the estimated selling prices in the ordinary course of business less expenses incidental to make the sale. Freehold land held for sale in the ordinary course of business is initially recognized at cost and subsequently measured at the lower of cost and net realiz able value. 2.8 Trade debts and other receivables Trade debts and other receivables are carried at original invoice amount being the fair value of amount to be received, less an estimate made for doubtful receivables based on review of outstanding amounts at the year end, if any. Provision is made against those having no activity during the last three years and is considered doubtful by the management. Balances considered bad and irrecoverable are written off when id entified. 2.9 a) Taxation Current The charge for current year is higher of the amount computed on taxable income at the current rates of taxation after taking into account tax credits and rebates, if any, and minimum tax computed at the prescribed rate on turnover. The charge for current tax also includes adjustments, where considered necessary, to provision for tax made in previous years arising from assessments framed during the yea r for such years. b) Deferred Deferred tax is computed using the balance sheet liability method providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the liability is settled based on tax rates that have been enacted or subsequently enacted at the balance sheet date. A deferred tax asset is recognized only to the extent that it is probable that future taxable profit will be a vailable and the credits can be utilized. 2.10 Borrowings Loans and borrowings are recorded at the proceeds received. Financial charges are accounted for on accrual basis. 2.11 Trade and other payables Liabilities for trade and other amounts payable are carried at cost which is the fair value of the consideration to be paid in the future for goods and servic es received.
34

2.12 Provisions Provisions are recognized when the Company has a present, legal or constructive obligation as a result of past events and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount can be made. Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimates. 2.13 Cash and cash equivalents For the purposes of cash flow statement, cash and cash equivalents consist of cash in hand and balances with banks net of borrowings not considered as being in the nature of financing activities. 2.14 Dividend Dividend distribution to the Companys shareholders is recognized as a liability in the Companys financial statements in the period in which the dividends are approved. 2.15 Impairment The Company assesses at each balance sheet date whether there is any indication that an asset may be impaired. If such indication exists, the carrying amounts of such assets are reviewed to assess whether they are recorded in excess of their recoverable amount. Where carrying value exceeds recoverable amount, assets are written down to the recoverable amount. 2.16 Financial instruments All the financial assets and financial liabilities are recognized at the time when the Company becomes a party to the contractual provisions of the instrument. Any gains or losses on de-recognition of the financial assets and financial liabilities are taken to profit and loss account currently. 2.17 Offsetting of financial assets and financial liabilities A financial asset and a financial liability is offset and the net amount is reported in the balance sheet if the Company has a legally enforceable right to set-off the recognized amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. 2.18 Foreign currency transactions and translation Transactions in foreign currencies are translated into rupees at the rates of exchange approximating those prevaling on the date of transactions or at the conrtact rate. Monetary assets and liabilities in foreign currencies are translated into rupees at the rates of exchange approximating those prevailing at the balance sheet date or at the contract rate. Exchange gains and losses are included in profit and loss account currently.
35

2.19 Staff retirement benefits The Company operates an un-funded gratuity scheme for its permanent employees. Provision is based on actuarial valuation of the scheme carried out as at June 30, 2005 in accordance with IAS-19 "Employee Benefits" and the resulting vested portion of past service cost has been charged to income in the current year. Contribution is made to this scheme on the basis of actuarial recommendations. Actuarial gains and losses at each valuation date are charged to profit and loss account. Gratuity is payable to staff on completion of prescribed qualifying period of service under the scheme.
A recognised provident fund scheme is also in operation, which covers all permanent employees. The Company and the employees make equal contributions to the fund. 2.20 Compensated absences The Company accounts for these be nefits in the period in which the absenc es are earned. 2.21 Revenue recognition Sales are recognized on disp atch of goods to customers. Interest income is recognized on accrual basis. Dividend on equity investments is recognised as income when the right to receive payment is established. Revenue from sale of freehold land held for sale is recognized in the period in which legal title is transferred to the buyer. 2.22 Related party transactions Transactions with related parties are based on the policy that all transactions between the Company and the related parties are carried out at arm's length. The prices are determined in accordance with the methods prescribed in the Companies Ordinance, 1984.
2.23 Interest and charges Interest and commitment charges on long term loans are capitalized for the period upto the date of commencement of commercial production of the respective plant and machinery acquired out of the proceeds of such loans. All other interest and charges are treated as expenses during the year. 2.24 Recoating expenses of DSA Plant Provision has been made in these financial statements for the erosion of coating on the anodes during the year based on best estimates available. Anodes once recoated are used for a period of three year s.
36
3. OPERATING FIXED ASSETS

PARTICULARS
COST
AS ON 01-07-2005 ADDITON/ REVALUATION DURING THE YEAR (DELETION) DURING THE YEAR AS ON 30-06-2006 RATE % AS ON 01-07-2005 (ADJUSTMENTS) FOR THE YEAR AS ON 30-06-2006
WRITTEN
DOWN VALUE AS ON 30-06-2006
Owned
Freehold land Buildings on freehold land Railway sidings Plant and machinery Other equipments Furniture and fixtures Office and other equipments Vehicles JUNE - 2006 JUNE - 2005 486 75,723 1,950 873,777 33,435 3,687 10,367 24,309 1,023,734 999,107 638,574 39,269 1,267,486 27 150 1,399 28,026 1,974,931 25,736 (297) (297) (1,109) 638,060 114,992 1,950 2,141,263 33,462 3,837 11,766 52,038 2,998,368 1,023,734 5 - 10 10 10 15 10 15 - 30 20 - 25 24,835 1,636 262,646 26,023 1,551 5,377 15,104 337,172 260,447 (256) (256) (112) 7,596 31 135,852 1,115 227 1,252 5,208 151,281 76,837 32,431 1,667 398,498 27,138 1,778 6,629 20,056 488,197 337,172 639,060 82,561 283 1,742,765 6,324 2,059 5,137 31,982 2,510,171 686,562
3.1 Free hold land was revalued by an independent valuer M/s. Harvestor Services Private Limited as at May 25, 2006 on the basis of market value. Had there been no revaluation on that date, the value of operating fixed assets would have been lower by Rs. 638.574 million (2005: NIL)
Note 3.2 Depreciation charge for the year has been allocated as under:
2006
2005
Cost of sales Selling and distribution expenses General and administrative expenses
29 30 31
149,006 339 1,936 151,281
74,765 319 1,753 76,837
3.3 Disposal of operating fixed assets
Cost
Accumulate depreciation
Written down value
Sale proceeds
Gain on disposal
Mode of disposal
Sold to
Vehicle
297
(256)
41
90
49
Negotiation
Imtiaz Ahmad Lahore.
37
Note 4 CAPITAL WORK IN PROGRESS This comprises of: Plant and machinery Building
2006 2005 (Rupees in thousand)
24,156 24,156
782,077 25,257 807,334
An amount of Rs.1,278.189 million (2005: Rs.1.807 million ) has been transferred to operating fixed assets. During the year interest and charges amounting to Rs.46.943 (2005: Rs.34.164 million ) have been capitalized. 5 LONG TERM INVESTMENTS Available for sale Investment in associated companies - unquoted Chemi Visco Fibre Limited 5,625,000 (2005: 5,625,000) fully paid ordinary shares of Rs.10/- each. Equity held: 7.91% (2005: 7.91%) (Chief Executive: Mr. Usman Ghani Khatri) Less: Provision for diminution in value of investment Chemi chloride Industries Limited Advance against issue of shares
56,250
56,250
5.1
(56,250) 1,000 1,000
(56,250) -
5.2
Investment in others - quoted National Bank of Pakistan Ltd 3,789 ordinary shares (June 2005: 3,158) including 3,006 bonus shares of Rs. 10/- each Add: Fair value gain 8 809 817 1,817 8 333 341 341
38
5.1
The management has made full provision against the carrying value of the investment in Chemi Viscofibre Limited, an associated company. The provision has been made as a matter of prudence since the project of the investee company is not operating and there is some uncertainty regarding future earnings and rela ted cash flows. This amount has been paid to Chemi Chloride Industries Limited as an advance against future issue of shares. 2006 2005 (Rupees in thousand) DEFERRED COST Note Balance as at July 01 Less: Amortization for the yea r 2,601 850 1,751 3,451 850 2,601
5.2
STORES, SPARES AND LOOSE TOOLS Stores Spares: in hand in transit Loose tools Less: Provision for obsolete stores a nd spares 98,703 217,185 8,110 225,295 230 324,228 22,432 301,796 102,434 179,066 15,302 194,368 423 297,225 22,432 274,793
STOCK IN TRADE Raw materials: in hand in transit Packing materials Work in process Finished goods Freehold land held for sale
8.1
60,325 60,325 971 3,322 31,600 48,399 144,617
48,210 26,027 74,237 1,441 2,710 14,371 92,759
39
8.1
The fair value of the free hold land held for sale as determined by Sakina Enterprises, approved valuer, as at the balance sheet date was Rs. 53.340 million. 2006 2005 (Rupees in thousand)
Note 9 TRADE DEBTS Secured Considered good Unsecured Considered good Considered doubtful
50,818 9.1 150,524 27,226 177,750 228,568 27,226 201,342
47,161 124,355 24,653 149,008 196,169 24,653 171,516
Less: Provision for doubtful de bts
9.2
9.1
These include balances due from related parties and associated companies aggregating to Rs. 7.892 million (2005: Rs. 48.329 million) comprising of the following: Chemi Visco Fiber Limited Chemitex Industries Limited Chemi Dyestuff Industries (Private) Limited 5,823 1,774 295 7,892 41,058 6,742 529 48,329
Maximum aggregate amount remaining outstanding from related parties and associated Companies at the end of any month during the year was Rs.57.163 million. (2005: Rs. 95.509 million). 9.2 Movement of provision for doubtful debts is as follows: Opening balance Adjustment on account of: Reversal for amount of doubtful debts realized Provision for doubtful debts written off Provision for doubtful debts for the year Net adjustment Closing balance 24,653 (299) (236) 3,108 2,573 27,226 22,865 (101) 1,889 1,788 24,653
40
2006 2005 (Rupees in thousand) 10 LOANS AND ADVANCES Advances - (unsecured - considered good) To employees For supplies and services Against purchase of land Against import Considered doubtful For supplies and services To employees
1,273 11,376 7,437 1,486 21,572 1,525 259 1,784 23,356 1,784 21,572
729 68,818 49,087 166 118,800 1,525 225 1,750 120,550 1,750 118,800
Less: Provision for doubtful advances
11
TRADE DEPOSITS AND SHORT TERM PREPAYMENTS Trade deposits Considered good Considered doubtful Less: Provision for doubtful deposits Prepayments
4,673 584 5,257 584 4,673 532 5,205
2,834 292 3,126 292 2,834 1,364 4,198
12
OTHER RECEIVABLES (Considered good) Insurance claims receivable Others
1,913 264 2,177
8,700 264 8,964
41

Note 13 TAX REFUNDS DUE FROM GOVERNMENT (Considered good) Income tax Sales tax
5,974 5,974
50,207 9,761 59,968
14
TAXATION - NET Advance income tax Less: Provision for taxation 83,467 15,917 67,550 134,160 58,387 75,773
15
CASH AND BANK BALANCES Cash in hand Cash at banks Current accounts Deposit accounts 1,686 256,008 19 256,027 257,713 1,445 79,367 19 79,386 80,831
15.1
15.1 16 16.1
The rate of interest on deposit accounts is 0.17 % per annum (2 005: 0.6 % to 1 % per annum). SHARE CAPITAL Authorized share capital
Number of ordinary shares of Number of shares of Rs. 10/- each 2006 50,000,000 25,000,000 75,000,000 2005 50,000,000 25,000,000 75,000,000 Ordinary shares of Rs. 10 each Preference shares of Rs. 10 each
500,000 250,000 750,000 500,000 500,000 250,000 250,000 750,000 750,000
42

Number of ordinary shares of Rs. 10/- each 2006 2005
Note 2006 2005 (Rupees in thousand)
16.2
ISSUED, SUBSCRIBED AND PAID UP CAPITAL Number of ordinary shares of 50,000,000Rs. 10/- each 50,000,000 Ordinary shares of Rs. 10 each 2006 25,000,000 2005 25,000,000 Preference shares of Rs. 10 each
75,000,000 100,000
24,900,000
75,000,000 100,000
24,900,000
Fully paid in cash
1,000
1,000
16.2
Issued for consideration other than cash Note 5,000,000 5,000,000 Fully paid bonus shares ISSUED, SUBSCRIBED AND PAID UP CAPITAL 30,000,000 30,000,000 Shares held by associated companies
2006 2005 249,000 249,000 (Rupees in thousand) 50,000 50,000
300,00
300,00
16.2.1
The Company in its Extra Ordinary General Meeting held on August 10, 2005 had passed a special resolution to raise Rs. 250.00 million through issuance of 25,000,000 non voting cumulative preference shares (PS issue) of Rs.10/- each to the banks and financial institutions for the purpose of investment of Rs. 175 million in Chemi Chloride Industries Limited (CCIL), an associated company, for setting up a calcium chloride plant by the said company and utilization of rest of the amount for expansion of IEM plant of the Company. 1,000 1,000 249,000 249,000 Although a conditional approval from Securities and Exchange Commission of Pakistan (SECP) was 50,000 obtained for Rs. 200 million the financing structure was reviewed in the context of changes50,000 in market conditions and it was decided not to proceed with the issue of preference shares. The cancellation was approved by the shareholders at Extra Ordinary General Meeting of the Company held on June 19, 2006. 300,000 300,000
RESERVES Fair value reserve Unappropriated profit 809 326,030 326,839 333 206,516 206,849
17
18
SURPLUS ON REVALUATION OF FIXED ASSETS This amount represents surplus arising on the revaluation of freehold land carried out on May 25, 2006 by an independent valuer M/s. Harvestor Services Private Limited on the basis of market value.
19
REDEEMABLE CAPITAL Term finance certificates (TFCs) - secured Less: Current portion shown under current liabilities 19.1 26 166,533 83,267 83,266 249,800 83,267 166,533
43

19.1 The TFCs have been issued as fully paid scrips of Rs. 5,000 denomination or exact multiple thereof for general public and Rs. 100,000 denomination or exact multiple thereof for Pre-IPO investors. These are listed on Karachi S tock Exchange (Guarantee) Limited. Terms and conditions Call option The Company may redeem the TFCs by way of exercise of the call option by giving notice in writing to the TFC holders and the Trustee at least sixty days prior to the option redemption date. The call option will be exercisable after a period of 18 months from the last date of public subscription. The call option may only be exercis ed by the Company with respect to a ll of the outstanding TFCs. Put option The investors have no right to exerc ise put option. Rate of return The return on TFCs is payable semi annually and is calculated at the State Bank of Pakistan's (SBP) discount rate plus 2.5% per annum with a floor of 7% and cap of 12% per annum. Principal redemption Principal amount shall be redeemed in six semi annual installments after a grace period of twenty four months from the last date of public subscription. Security The TFCs are secured by way of first pari passu charge on all present and future fixed assets of the Company with a 15% margin by hypothecation charge and memorandum confirming constructive deposit of title deeds. Trustee In order to secure the interests of the TFC holders, ORIX Investment Bank Pakistan Limited (ORIX) has been appointed as Trustee for the issue. Orix will be paid trustee fee at the rate of 0.035% per annum of the outstanding principal. The fee shall be payable at the beginning of each year commencing from the date of signing of trust deed and on subsequent anniversary the reof.
44

The Trustee shall ensure that the terms and conditions of the security document are adhered to and that the interests of the TFC holders are safe guarded by taking actions that it deems necessary in the event of any breach of terms and conditions of the TFC instrument, the trust deed and the security docume nts by the Company. Redemption reserve No redemption reserve has been established for redemption of TFCs, as in view of the projected financial cash flows, the Company shall have adequate funds to meet its financial obligations arising from the issue of these certificates. Note 20 LONG TERM FINANCING Secured Banking companies Askari Commercial Bank Limited Faysal Bank Limited Askari Commercial Bank Limited United Bank Limited-Syndicated KASB Bank Limited-Syndicated The Bank of Punjab-Syndicated Other Financial Institutions Saudi Pak Agricultural and Industrial Corporation Pakistan Industrial Credit and Investment Corporation Limited Pak Libya Holding Company (Private) Limited-Syndicated Unsecured Loans from Directors Others 2006 2005 (Rupees in thousand)
20.1 20.2 20.3 20.4 20.5 20.5
300,000 60,000 312,971 43,750 43,750 760,471
30,000 350,000 50,000 50,000 480,000
20.6 20.7 20.8
37,500 97,820 43,750 179,070 939,541 200,290 739,251
58,929 137,261 50,000 246,190 5,672 14,328 20,000 746,190 153,370 592,820
20.9 20.9
Less: Current portion shown under current liabilities
26
45

20.1 20.2 This facility has been fully repaid during the year. This finance is secured against ranking charge over fixed assets of the Company and carries mark up at six months average KIBOR Ask rate plus 3.00 % per annum. The loan is repayable in July 2007. This finance is secured against ranking charge over all present and future fixed assets of the Company and carries mark up at three months average KIBOR Ask rate plus 3.21 % per annum. Loan is repayable in twenty quarterly installments commencing from July 3 1, 2006. This finance is secured against first pari passu charge on all present and future fixed assets of the Company and carries mark up at three months average KIBOR Ask rate plus 1.50 % per annum. The loan was disbursed in November 2004 and is repayable in sixteen equal quarterly installments commencing from February 2006 . These finances are secured against first pari passu charge on all present and future fixed assets of the Company and carry mark up at six months average KIBOR Ask rate plus 1.80 % (with floor of 3% and cap of 9%) per annum. These loans were disbursed in November 2004 and are repayable in sixteen equal quarterly installments commencing from January 20 06. This finance is secured against first pari passu charge over present and future fixed assets of the Company and carries mark up at six months average KIBOR Ask rate plus 2.70 % per annum. The loan is repayable in fourteen qua rterly installments commencing from Novemb er 11, 2004.
20.3
20.4
20.5
20.6
20.7
This finance is secured against first pari passu charge over all assets of the Company except inventories and carries mark up at six months average KIBOR Ask rate plus 3.83 % with floor of 6 % per annum. The loan is repayable in twenty quarterly installments commencing from December 2003. This finance is secured against first pari passu charge on all present and future fixed assets of the Company and carries mark up at six months average KIBOR Ask rate plus 1.80 % (with floor of 3% and cap of 9%) per annum. These loans were disbursed in November 2004 and are repayable in sixteen equal quarterly installments commencing from January 20 06. These loans have been fully repaid during the year. Note 2006 2005 (Rupees in thousand)
20.8
20.9
21
LONG TERM MURABAHA Faysal Bank Limited Faysal Bank Limited Faysal Bank Limited Less: Current portion shown under current liabilities 21.1 21.2 21.3 87,500 100,000 150,000 337,500 76,313 261,187 100,000 100,000 200,000 12,500 187,500
26
46

21.1 This finance is secured against first pari passu charge over all present and future fixed assets of the Company and carries mark up at six months average KIBOR Ask rate plus 1.80% (with floor of 3% and cap of 9% )per annum. The loan is repayable in sixteen equal quarterly installments commencing from February 2 006. This finance is secured against first pari passu charge over all fixed assets of the Company and carries mark up at six months average KIBOR Ask rate plus 2.25% per annum. The loan is repayable in eight equal semi annual installments commencing from October 2 006. This finance is secured against first pari passu charge over all fixed assets of the Company and carries mark up at six months average KIBOR Ask rate plus 2.25% per annum. The loan is repayable in sixteen equal qua rterly installments commencing from November 2006.
21.2
21.3
22
DEFERRED LIABILITIES Note Provision for recoating of DSA a nodes Deferred taxation Provision for gratuity 22.1 22.2 22.3
2006 2005 (Rupees in thousand) 28,097 139,655 2,169 169,921 23,570 91,445 2,139 117,154
22.1
Provision for Dimensionally Stable Anodes (DSAs) Balance brought forward Payments made against recoa ting of anodes Provision made during the year f or recoating Less: Current portion included in accrued liabilities 40,033 (2,680) 7,159 44,512 (16,415) 28,097 28,274 (7,782) 19,541 40,033 (16,463) 23,570
22.2
Deferred taxation Deferred tax liability comprises as follows: Taxable temporary differences Tax depreciation allowances Deferred cost Deductible temporary differences Provision for gratuity Provision for diminution in value of investment Turnover Tax Unused tax losses
341,270 613 341,883 (759) (19,688) (11,000) (170,781) 139,655
110,971 910 111,881 (749) (19,687) 91,445
47

22.3 a. DEFINED BENEFIT PLAN General description The scheme provides for terminal benefits for all its permanent employees who qualify for the scheme. The defined benefit payable to each employee at the end of his service comprises of total number of years of his service multiplied by last drawn basic salary including cost of living allowance. Annual charge is based on actuarial valuation carried out as at June 30, 2005 using the Projected Unit Credit method. b. Significant actuarial assumptions Following are significant actuarial assumptions used in the valuation: Discount rate Expected rate of increase in salary 9% per annum 9% per annum 8% per annum 8% per annum 2006 2005 (Rupees in thousand) c. Reconciliation of payable to defined benefit plan Present value of obligation Liability recognized in balance sheet d. Movement of liability recognized in the balance sheet 2,169 2,169 2,139 2,139
Present value of obligation at the start of the year Current service cost Interest cost Contribution paid to outgoing employees Closing net liability e. Charge for the year Current service cost Interest cost Charge for the year
2,139 254 197 (421) 2,169
1,898 206 152 (117) 2,139
254 197 451
206 152 358
48

Note 23 TRADE AND OTHER PAYABLES Trade creditors Accrued liabilities Advances from customers Deposits-interest free repayable on demand Sales tax payable Income tax deducted at source Workers' Profit Participation Fund Workers' Welfare Fund Other liabilities 29,536 134,450 11,542 16,237 191,765 19,330 635 9,029 335 221,094 34,851 116,575 27,287 15,353 194,066 456 4,972 1,689 498 201,681 2006 2005 (Rupees in thousand)
23.1
23.2
23.1
These include a balance due to Chemi Multifabrics Limited, an associated company, amounting to Rs. 5.793 million (2005: Rs. 5.483 million). Maximum aggregate amount remaining outstanding at the end of any month during the year was Rs. 8.720 million. (2005: Rs. 10.352 million). Workers' Profit Participation Fund Balance as at July 01, Interest at prescribed rate Less: Amount paid to fund Current year's allocation at 5% 32 4,972 272 5,244 5,003 241 8,788 9,029 4,852 302 5,154 4,941 213 4,759 4,972
23.2
The Company retains the allocation of this fund for its business operations till the amounts are paid to the fund together with interest at prescribed rate under the Act. 24 MARK UP ACCRUED Accrued mark up/interest Secured Long term financing Term finance certificate Long term murabaha Short term borrowings
8,499 240 5,332 14,449 28,520
10,086 315 2,984 4,640 18,025
49
Note 25 SHORT TERM BORROWINGS Secured Banking companies Running finances MCB Bank Limited Metropolitan Bank Limited Askari Commercial Bank Limited The Bank of Punjab Limited KASB Bank Limited Murabaha Faysal Bank Limited
25.1 25.2 25.3 25.4 25.5
83,562 23,536 125,215 149,679 49,985
90,051 24,828 145,154 49,670 -
25.6
431,977
49,694 359,397
25.1
This facility is secured against first pari passu charge over present and future fixed and current assets of the Company and hypothecation of stock of chemicals. The facility carries mark-up at three months average KIBOR Ask rate plus 1.5% spread (with floor of 10.00 %) per annum. The limit of finance is Rs. 90 million (2005:Rs. 90 million). This facility is secured against first pari passu charge over fixed and current assets of the Company, and carries mark-up at the rate of 10.10 % per annum. The limit of finance is Rs. 25 million (2005: Rs. 25 million). This facility is secured against first pari passu charge over all present and future current assets of the Company and carries mark-up at six months average KIBOR Ask rate plus 1.71 % per annum. The limit of finance is Rs. 15 0 million (2005: Rs. 150 million). This facility is secured against first pari passu charge upto the limit of Rs. 50 million and floating charge upto the limit of Rs. 100 million on all present and future current assets of the Company and carries mark-up at six months average KIBOR Ask rate plus 2.5 % per annum (with floor of 3.5 %) per a nnum. The limit of finance is Rs. 150 million (2005: Rs. 150 million).
25.2
25.3
25.4
25.5
This facility is secured against ranking charge over all present and future current assets of the Company and carries mark-up at six months average KIBOR Ask rate plus 2 % per annum. The limit of finance is Rs. 50 million (2005: Nil )
50
25.6
This facility is secured against first pari passu charge over present and future current assets of the Company and carries mark-up at six months average KIBOR Ask rate plus 2 % per annum. The limit of finance is Rs. 100 million (2005: Rs. 100 million). 2006 2005 (Rupees in thousand)
Note 26 CURRENT PORTION OF LONG TERM LIABILITIES Redeemable capital Long term financing Long term murabaha 19 20 21
83,267 200,290 76,313 359,870
83,267 153,370 12,500 249,137
27 27.1 a)
CONTINGENCIES AND COMMITMENTS Contingent liabilities Demand created for assessment year 1996-97 with respect to disallowance of expenses incurred on account of Golden Hand Shake (GHS) and of Voluntary Separation Scheme (VSS) amounting to Rs. 56.437 million for reason of non deduction of withholding tax on payment of such expenses had been set aside by the Honorable Income Tax Appellate Tribunal (ITAT) with direction to recompute the tax liability by using the specified methodology. The Inspecting Additional Commissioner (IAC), vide his order dated December 23, 2003 had restored the original assessment under section 66-A of the Income Tax Ordinance 1979 without considering the directions of ITAT. Management had filed a revised petition before ITAT and Reference Application before the Learned Lahore High Court. The matter has now been remanded back to IAC by ITAT. In the event of an adverse decision, the Company would be faced with a charge against profit of Rs. 34.107 million (June 2005: Rs. 34.107 million).
b)
The liability for income tax determined for assessment year 2002-03 amounted to Rs. 46.112 million. The Company had filed an appeal to the Commissioner Appeals (CIT) against the assessment order of Deputy Commissioner Income Tax (DCIT). CIT appeals vide his order dated October 03, 2005 has given the decision in favour of the Company and accepted all the items as permissible which were not acknowledged by the DCIT. The department has filed an appeal against the order of CIT Appeals. In the event of an adverse decision the Company would be faced with a charge against profit of Rs. 5.974 million. (June 2005: Rs. 10.205 million).
51
c)
Letters of guarantee outstanding as at June 30, 2006 were Rs. 103.239 million (2005: Rs.84.843 million). Commitments Commitments as on June 30, 2006 were as follows:
27.2
a) b)
Against letters of credit outstanding amounting to Rs. 23.068 million (2005: Rs. 236.894 million) Against purchase of land amounting to Rs.7.047 million (2005:Rs 64.400 million).
52
Note 28 SALES Sales Manufacturing Trading
28.1
2,516,096 3,152 2,519,248 328,372 33,109 361,481 2,157,767
2,200,904 7,172 2,208,076 276,332 28,880 305,212 1,902,864
Less: Sales tax Commission to selling agents
28.1 29
This amount includes export sales amounting to Rs. 3.658 million (2005: Rs.15.500 million). COST OF SALES Raw materials consumed Opening stock Purchases Raw material traded Closing stock Stores, spares and loose tools consume d Packing materials consumed Production supplies consumed Salaries, wages and benefits Fuel and power Repair and maintenance Insurance Depreciation Vehicle running expenses Postage, printing and stationery Other expenses
29.1
3.2
48,210 274,998 323,208 (60,325) 262,883 170,586 2,690 11,159 77,549 994,636 22,088 6,716 149,006 6,019 2,197 1,822 1,444,468
19,007 236,435 255,442 (725) (48,210) 206,507 108,256 2,756 23,541 63,866 1,060,985 12,214 3,833 74,765 5,000 2,578 971 1,358,765
53

Note Work in process Opening Closing Cost of goods manufactured Cost of raw materials traded Cost of stores traded Finished goods Opening Purchases of trading goods Closing 2006 2005 (Rupees in thousand) 2,710 (3,322) (612) 1,706,739 129 14,371 2,747 (31,600) (14,482) 1,692,386 2,546 (2,710) (164) 1,565,108 725 4,350 12,671 1,298 (14,371) (402) 1,569,781
29.1
This amount includes Rs.0.301 million (2005: Rs.0.111 million) in respect of employees' retirement benefits. SELLING AND DISTRIBUTION EXPENSES Salaries, wages and benefits Traveling and conveyance Vehicle running expenses Advertisement Telephone, telex and postage Marketing service charges Freight Rent, rates and taxes Printing and stationery Fee and subscription Fuel and power Repair and maintenance Depreciation 30.1 6,272 616 625 1,313 924 21,645 68,855 610 163 572 283 339 102,217 4,964 241 468 1,025 1,014 19,253 46,687 610 155 84 639 127 319 75,586
30
3.2
30.1
This amount includes Rs. 0.013 million (2005: Rs.Nil ) in respect of employees' retirement benefits.
54

Note 31 GENERAL AND ADMINISTRATIVE EXPENSES Salaries, wages and benefits Traveling and conveyance Vehicle running expenses Telephone, telex and postage Rent, rates and taxes Printing and stationery Fee and subscription Legal and professional charges Fuel and power Provision for doubtful trade d ebts Provision for doubtful advances and deposits Advances and deposits written off Repair and maintenance Depreciation Amortization of deferred cost Donations 31.1 26,847 10,329 1,947 1,187 1,320 229 3,317 617 686 3,108 326 619 1,936 850 3,104 56,422 31.1 21,922 7,935 1,512 1,191 1,320 294 4,157 527 769 1,889 544 732 358 1,753 850 1,844 47,597 2006 2005 (Rupees in thousand)
3.2 31.2
This amount includes Rs.0.298 million (2005: Rs. 0.022 million) in respect of employees' retirement benefits. Recipients of donations do not include any donee in whom any director of the Company or his spouse has any interest. OTHER OPERATING EXPENSES Auditors' remuneration Audit fee Half yearly review fee Tax and certification charges Out of pocket expenses Provision for diminution in value of investment Workers' profit participation fund 5 23.2
31.2
32
200 80 220 38 538 8,788 9,326
200 63 115 25 403 56,250 4,759 61,412
55
Note 33 OTHER OPERATING INCOME Income from financial assets Dividend income Gain on foreign exchange Recovery of bad debts Provision against doubtful deposits written back Gain on sale of investment Income from non- financial assets Gain on sale of fixed assets Sale of scrap Income from related parties Late payment charges on overdue invoices
8 299 307 49 6,852 6,901 4,147 11,355
4 120 101 92 243 560 173 2,955 3,128 477 4,165
34
FINANCIAL CHARGES Markup/interest on: Long term financing Term Finance Certificates Finance leases Short term borrowings Workers' profit participation fund Bank charges and commission Foreign exchange loss
23.2
66,412 26,231 46,218 272 139,133 2,849 73 142,055
23,751 25,029 3 11,811 302 60,896 1,613 62,509
35
TAXATION For the year: Current Prior year Deferred tax
35.1
11,000 (12,008) 48,210 47,202
9,700 29,954 39,654
56
35.1
In view of the tax loss for the year, provision for current year taxation includes minimum tax payable under Section 113 of the Income Tax Ordinance, 2001. As the tax charge represents minimum tax under the Income Tax Ordinance, 2001, therefore, numerical reconciliation between the average effective tax rate and the applicable tax rate is not prepared and presented.
35.2
36
ACCOUNTING ESTIMATES AND JUDGEMENTS The Company's main accounting policies affecting its result of operations and financial conditions are set out in note 2. Judgements and assumptions have been required by the management in applying the Company's accounting policies in many areas. Actual results may differ from estimates calculated using these judgements and assumptions. Key sources of estimation uncertainty and critical accounting judgements are as f ollows:
Income taxes The Company takes into account relevant provisions of the current income tax laws while providing for current and de ferred taxes as expla ined in note 2.9 to these financia l statements.
Defined benefit plan Certain actuarial assumptions have been adopted by external professional valuer (as disclosed in note 22.3) for valuation of present value of defined benefit obligations and fair value of plan assets. Any changes in these assumptions in future years might affect unrecognized gains and losses in those years.
57

Property, plant and equipment The estimates for revalued amounts, if any, of different classes of property, plant and equipment, are based on valuation performed by external professional valuers and recommendation of technical teams of the Company. Further, the Company reviews the value of the assets for possible impairment on an annual basis. Any change in the estimates in future years might affect the carrying amounts of the respective items of property, plant and equipments with a corresponding effect on the depreciation charge and impairment. As explained in note 18 to these financial statements, the Company has revalued its free hold land during the year resulting in a revaluation surplus of Rs. 638.574 million. 37 EARNINGS PER SHARE - BASIC AND DILUTED 2006 2005 Number of shares in thousand Average issued ordinary shares 30,000 30,000
(Rupees in thousand) Profit after taxation (Rupees) Earnings per share (Rupees) 38 TRANSACTIONS WITH RELATED PARTIES INCLUDING ASSOCIATED UNDERTAKINGS The related parties including associated undertakings comprise local associated undertakings, staff retirement funds, Directors and key management personnel. Transactions with related parties are as follows: Nature of transaction Marketing service charges Sale of goods and services Late payment charges Loan from directors paid ba ck Contribution to staff retirement benefit plans Remuneration to directors and key management personnel Advance against issue of shares (Rupees in thousand) 21,645 18,151 4,147 20,000 130 13,005 1,000 19,255 81,369 133 9,199 119,514 3.98 50,490 1.68
58

39 39.1 FINANCIAL INSTRUMENTS RELATED DISCLOSURES Liquidity risk Liquidity risk is the risk that Company will encounter difficulties in raising the funds to meet commitments associated with the financial instruments. The Company believes that it is not exposed to any significant level of liquidity risk. 39.2 Currency risk Currency risk is the risk that the value of financial instruments will fluctuate due to changes in the foreign exchange rates. The Company's exposure to currency risk in respect of financial liabilities in the United States dollars is Rs. 23.068 million ( 2005: Rs. 236.894 million). 39.3 Concentration of credit risk Credit risk represents the accounting loss that would be recognized at the reporting date if the counter parties fail c ompletely to perform as contracted. 39.4 Fair value of financial instruments The carrying value of all the financial assets and financial liabilities are estimated to approximate their fair values.
59
39.5 Interest rate risk

Interest rate risk is the risk that the value of the financial instruemnts will fluctuate due to changes in the interest rates. The Company manages this risk through risk management strategies. Interest rate risk of the Company's financial assets and labilities as at June 30, 2006 can be evaluated from following schedule: Interest / markup bearing Maturity upto one year Maturity after one year Sub total Non - interest bearing Maturity Maturity upto one after one Sub total year year 2006 Total
(Rupees in "000")
2005
Financial Assets
Long term Investments Long term deposits Trade debts Loans and advances Trade deposits Other receivables Tax refunds due fom Government Cash and bank balances 2006 2005 Financial Liabilities Redeemable capital Long term borrowings Long term murabaha Deferred liabilities Trade and other liabilities Mark up accrued Short term borrowings 2006 2005 On balance sheet gap: 2006 2005 Unrecognized financial assets and liabilities Commitments Letters of credit Off balance sheet gap: 2006 2005 Net financial assets /(liabilities) 2006 2005 7,597 19 7,616 41,077 7,597 19 7,616 41,077 193,745 21,572 4,673 2,177 5,974 257,694 485,835 401,837 1,817 14,658 16,475 14,997 1,817 14,658 193,745 21,572 4,673 2,177 5,974 257,694 502,310 416,834 1,817 14,658 201,342 21,572 4,673 2,177 5,974 257,713 509,926 341 14,656 171,515 118,801 2,834 8,964 59,968 80,832 457,911
83,267 200,290 76,313 28,520 431,977 820,367 626,560 (812,751) (585,482)
83,266 739,251 261,187 1,083,704 926,853 (1,083,704) (926,853)
166,533 939,541 337,500 28,520 431,977 1,904,071 1,553,413 (1,896,455) (1,512,336)
221,094 221,094 201,683 264,741 200,154
2,169 2,169 22,139 14,306 (7,142)
2,169 221,094 223,263 223,822 279,048 193,012
166,533 939,541 337,500 2,169 221,094 28,520 431,977 2,127,334
249,800 746,190 200,000 2,139 201,683 18,026 359,397
1,777,235 (1,617,407) (1,319,324)
7,047 23,068 30,115 301,294
7,047 23,068 30,115 301,294
7,047 23,068 30,115
64,400 236,894
301,294
(812,751) (585,482)
(1,083,704) (926,853)
(1,896,455) (1,512,336)
234,626 (101,140)
14,306 (7,142)
248,933 (108,282)
(1,647,522) (1,620,618)
Effective interest rates are mentioned in the respective notes to the financial statements.
60
40
Remuneration of Chief Executive, Directors and Executives The aggregate amount charged in the financial statements for the year for remuneration, including certain benefits, to the Chief Executive, full time working directors and executives of the Company are as follows:
Chief Executive 2006 2005
Directors 2006 2005 (Rupees in thousand) 1,600 720 80 2,400 2 1,333 600 67 2,000 2
Executives 2006 2005
Managerial remuneration House rent allowance Medical expenses
900 405 45 1,350 1
667 300 33 1,000 1
6,170 2,776 309 9,255 14
4,133 1,860 206 6,199 9
Number of persons
40.1 The Company also provides the chief executive and some of the directors and executives with free use of cars and mobile phones.
41 Capacity and production
Installed capacity Tons 2006 2005 Caustic soda 143,550 110,550 Actual production Tons 2006 2005 86,234 81,392 Reason for shortfall
Production remained below the installed capacity because Ionic Exchange Membrane plant having annual installed capacity of 33,000 tons started regular production at the end of the financial year. Lack of demand Lack of demand Lack of demand Lack of demand Very fluctuating market, prices are fixed on fortnightly basis, which is difficult to follow. Plant was run for captive use only. Low production because of non availability of required raw materials within the country.
Liquid chlorine Hydrochloric acid Sodium Hypochlorite Bleaching earth Sulphuric acid
13,200 123,750 49,500 3,300 3,300
13,200 123,750 49,500 3,300 3,300
10,157 97,410 47,145 2,463 618
10,921 98,209 45,178 2,315 -
Zinc sulphate
600
600
172
51
61
42
NUMBER OF EMPLOYEES Total number of employees (including contracted ) at the year end was 707 (2005: 668).
43
DATE OF AUTHORIZATION OF ISSUE These financial statements were authorized for issue on October 07, 2006 by the Board of Directors of the Company.
44
CORRESPONDING FIGURES Previous year's figures have been re-arranged and re-classified wherever necessary for the purpose of comparison. Major changes made during the yea r were as follows: An amount of Rs.39.830 million previously classified as "Mercury in cells" under "noncurrent assets" has been classified as "Stores, spares and loose tools" for more appropriate presentation. Mercury in hand amounting to Rs. 2.255 million previously classified as "stock in trade" has now been classified as "S tores, spares and loose tools". As the tax charge for the last year represents minimum tax under the Income Tax Ordinance, 2001, therefore numerical reconciliation between the average effective tax rate and the applicable tax rate has not been presented.
45
GENERAL Figures have been rounded off to the nearest rupees in thousand unless stated otherwise.
CHIEF EXECUTIVE
DIRECTOR
Muhammad Siddique Khatri Chief Executive
Abdul Sattar Khatri Director
62
PATTERN OF SHAREHOLDING AS AT JUNE 30, 2006 Number of Shareholders 10 14 72 141 172 7 6 3 4 1 3 1 3 3 1 1 1 3 1 2 4 6 Shareholding From 1 101 201 1001 5001 10001 15001 20001 25001 50001 55001 65001 115001 130001 145001 160001 175001 205001 220001 235001 265001 29000 To 100 500 1000 5000 10000 15000 20000 25000 30000 55000 60000 70000 120000 135000 150000 165000 180000 210000 225000 240000 270000 295000 Total Shares Held 642 5080 47055 416480 1068559 83300 105395 68331 120000 51500 180000 66000 360000 394200 150000 162000 180000 630000 222220 472800 1069200 1758027 -
63
Number of Shareholders 3 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 481
Shareholding From 295001 310001 325001 335001 340001 370001 380001 385001 395001 655001 705001 775001 1405001 1475001 1645001 1795001 1860001 2025001 2295001 3960001 To 300000 315000 330000 340000 345000 375000 385000 390000 400000 660000 710000 780000 1410000 1480000 1650000 1800000 1865000 2030000 2300000 3965000
Total Shares Held 896400 312000 330000 338400 344400 372000 384000 390000 398400 660000 705559 780000 1405200 1477800 1648800 1796400 1862352 2026800 2298000 3968400 30000000
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PATTERN OF SHAREHOLDING AS PER REQUIREMENT OF CODE OF CORPORATE GOVERNANCE

No. of Shareholders 2 ASSOCIATED COMPANIES Chemitex Industries Ltd. Jhelum Silk Mills (Pvt.) Ltd. DIRECTORS, THEIR SPOUSES AND MINOR CHILDERN Mr. Abdul Aziz Khatri Mr. Abdul Sattar Khatri Mr. Mansoor Ahmad Khatri Mrs. Farhana Abdul Sattar Khatri Mr. Muhammad Siddiqui Khatri Mr. Muhammad Siddiqui Khatri (CDC) Mr. Abdul Ghafoor Khatri Mr. Fawad Yousaf Mr. Fawad Yousaf (CDC) Mrs. Hafsa w/o Abdul Aziz Khatri Mrs. Mah-e-darakhsan w/o Mansoor Ahmed Khatri Mrs. Sabina w/o Muhammad Siddique Khatri Mrs. Fareeda w/o Abdul Ghafoor Khatri 338,400 1,796,400 270,000 266,400 120,000 3,962,400 384,000 312,000 21,331 294,000 120,000 294,000 236,400 1.1280% 5.9880% 0.9000% 0.8880% 0.4000% 13.2080% 1.2800% 1.0400% 0.0711% 0.9800% 0.4000% 0.9800% 0.7880% 1,648,800 1,405,200 3,054,000 11 5.4960% 4.6840% 10.1800% Particulars Shares held % age
8,415,331 5 PUBLIC SECTOR COMPANIES & CORPORATIONS National Fertilizer Corp. of Pakistan Sitara Chemicals Industries Ltd. (CDC) N. H. Securities (Pvt.) Ltd. (CDC) Networth Securities (Pvt.) Ltd. (CDC) Adeel & Nadeem Securities (Pvt.) Ltd. (CDC) 9,259 30,000 1,200 6,000 1,780 48,239 0 FINANCIAL INSTITUTION
28.0511%
0.0309% 0.1000% 0.0040% 0.0200% 0.0059% 0.1608%
0.0000% 0.0000%
463 481
SHARES HELD BY THE GENERAL PUBLIC Total
18,482,430 30,000,000
61.06081% 100.0000%
SHAREHOLDERS HOLDING 10% OR MORE OF TOTAL CAPITAL Mr. Muhammad Siddique
4,082,400 4,082,400
13.6080% 13.6080%
Directors, CEO, CFO, Company Secretary, spouses of directors and their minor childern have not conducted any trading in shares of the Company during the year under review. NIL
65
FORM OF PROXY
I/We ____________________________________________________________________________ of ________________________________ being a member/members of ITTEHAD CHEMICALS LIMITED, and holder of ________ shares as per Registered Folio No./CDC Participant's ID and A/c No.______ Sub A/c No.______ do hereby appoint Mr./Ms. ___________________________________________ of _____________________________ or failing him/her Mr./Ms. ___________________________________________ of _____________________________ who is also a member of ITTEHAD CHEMICALS LIMITED, vide Registered folio No./CDC Participant's ID as my/our proxy to attend, speak and vote for me/us and on my/our behalf at the 15th Annual General Meeting of the company to be held on Tuesday, October 31, 2006 at 11:30 a.m. at the Registered Office at 39, Empress Road, Lahore - and at any adjournment thereof. Signed by me/us this ___________________ day of ____________ 2006 1. 2. Witness __________________ Witness __________________ Please affix here Revenue Stamp of rupees five and sign across Signature of Member(s) Place: ________________
Important: 1. The Proxy Form, together with the power of attorney, if any, under which it is signed or a notarially certified copy thereof, should be deposited at the registered office of the company at 39-Empress Road, Lahore, as soon as possible but not later than 48 hours before the time of holding the meeting and in default Proxy Form will not be treated as valid. No person shall act as proxy unless he/she is a member of the company except a corporation being a member may appoint as its proxy and officer of such corporation whether a member of the company or not. If a member appoints more than one proxy, and more than one instruments of proxy are deposited by a member with the company, all such instruments or proxy shall be rendered invalid.
2. 3.
For CDC Account Holders / Corporate Entities: In addition to the above the following requirements have to be met: i) ii) The proxy form shall be witnessed by two persons whose names, addresses and NIC numbers shall be mentioned on the form. Attested copies of NIC or the passport of the beneficial owners and the proxy shall be furnished with the proxy form.
67

Annual Report 2006

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Annual Report 2006

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CONTENTS

CHIEF FINANCIAL OFFICER COMPANY SECRETRY REGISTERED OFFICE/HEAD OFFICE

BANKERS TO THE COMPANY

NOTICE OF ANNUAL GENERAL MEETING

By Order of the Board

NOOR ZAMAN KHAN Lahore: October 7, 2006 COMPANY SECRETARY

Ratio 70% 25% 5% 100%

Contribution (Rs.) 56,000,000 20,000,000 4,000,000 80,000,000

Ratio 70% 25% 5% 100%

Contribution (Rs.) 64,400,000 23,000,000 4,600,000 92,000,000

Particulars of collateral security to be obtained from borrower or justification if not needed;

Purpose of loans and advances;

Interest of directors and their relatives in the investee company;

DIRECTORS REPORT TO SHAREHOLDERS

Delegate Visits Plant Site

Signing Ceremony of SAP Business One Software

SIX YEARS SUMMARY OF FINANCIAL RESULTS

2,510 24 1,008 300 327 627 83 1,000 170 792

739 105 536 250 206 456 250 258 63 282

189 478 734 250 161 411 250 369 27 128

150 88 408 250 151 401 22 27 116

155 45 380 250 136 386 14 12 55

17.5% 8.0% 2.7% 10.3% 7.1% 1.68 1.02 20 0.63 64:36

15.1% 8.6% 3.0% 11.6% 9.7% 1.51 1.21 92 0.79 51:49

13.8% 8.2% 4.1% 15.3% 34.8% 2.11 1.30 95 0.86 1:99

Net Sales Rupees In Millions

500 450 400 350 300 181

Gross Profits Rupees In Millions

Operating Profit Rupees In Millions

180 160 140 120

Profit Before Tax Rupees In Millions

250 100 200 150 117 100 50 107 89 153 130 80 60 40 20

Profit After Tax Rupees In Millions

Earning Per Share Rupees In Millions

Operating Fixed Assets Rupees In Millions

Shareholders Funds Rupees In Millions

STATEMENT OF ETHICS AND BUSINESS PRACTICES

STATEMENT OF COMPLIANCE WITH THE CODE OF CORPORATE GOVERNANCE

Muhammad Siddique Khatri Chairman and Chief Executive

Lahore: October 7, 2006

Place: KARACHI Dated: October 07, 2006

BDO Ebrahim & Co. Chartered Accountants

AUDITORS' REPORT TO THE MEMBERS

Place: KARACHI Dated: October 07, 2006

BDO Ebrahim & Co. Chartered Accountants

Muhammad Siddique Khatri CHIEF EXECUTIVE Chief Executive

Abdul Sattar Khatri DIRECTOR Director

Muhammad Siddique Khatri Chief Executive CHIEF EXECUTIVE

Abdul Sattar Khatri Director DIRECTOR

(25,736) 1,807 1,283 (22,646) (702,494) 544 1,523 (2,696) (725,769)

Fair value reserve

Muhammad Siddique Khatri Chief Executive

Abdul Sattar Khatri Director

NOTES TO THE ACCOUNTS

NOTES TO THE ACCOUNTS

NOTES TO THE ACCOUNTS

NOTES TO THE ACCOUNTS

NOTES TO THE ACCOUNTS

NOTES TO THE ACCOUNTS

3. OPERATING FIXED ASSETS

149,006 339 1,936 151,281

74,765 319 1,753 76,837

3.3 Disposal of operating fixed assets