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Report for the Quarter and
Nine Months ended September 30, 2008
Nine Months Report – September 2008
CONTENTS
Company Information 2
Directors’ Report 3
Unaudited Condensed Interim Financial Statements 4
Unaudited Condensed Consolidated Interim Financial Statements 18
Nine Months Report – September 2008
2
COMPANY INFORMATION
Chairman Asad Umar
President & Chief Executive Asif Qadir
Directors Isar AhmadKhalid MansoorKhalid S. SubhaniMasaharu DomichiShabbir HashmiShahzada DawoodTakeshi HagiwaraWaqar A. Malik
Company Secretary Arshaduddin Ahmed
Board Audit Committee Isar AhmadKhalid S. SubhaniShabbir HashmiMasaharu Domichi
Bankers Allied Bank Ltd.Askari Commercial Bank Ltd.Bank Al Falah Ltd.Bank Al Habib Ltd.Citibank N.A.Samba Bank Ltd. (Formerly Crescent Commercial Bank Ltd.)Faysal Bank Ltd.Habib Bank Ltd.Hongkong Shanghai Banking CorporationMCB Bank Ltd.Meezan Bank Ltd.National Bank of PakistanNIB Bank Ltd.Standard Chartered Bank (Pakistan) Ltd.United Bank Ltd.
Auditors A. F. Fergusons & Co., Chartered AccountantsState Life Building No. 1-C, I.I. Chundrigar Road, Karachi.
Registered Office First Floor, Bahria Complex I24 M.T. Khan Road, Karachi - 74000
Manufacturing Facility EZ/1/P-II-1, Eastern Zone, Bin Qasim, Karachi.
Share Registration Office FAMCO Associates (Private) Limited [Formerly Ferguson Associates (Private) Limited]4th Floor, State Life Building 2-A, I.I. Chundrigar Road, Karachi - 74000
Website www.engropolymer.com
Nine Months Report – September 2008
3
DIRECTORS� REPORT
The Board of Directors of Engro Polymer & Chemicals Ltd. is pleased to present the unaudited accounts of theCompany for the third quarter ended September 30, 2008.
Business Review
Domestic sales volume during 3Q 2008 was 22 thousand tons down from 25 thousand tons in 3Q 2007. This wasprimarily due to Eid and declining price trend which put the customers on a wait and see mode. Year to datedomestic sales were 78 thousand tons showing a growth of 5% over the corresponding period last year. Productionfor the nine months was a record 75 thousand tons, an increase of 12% over the same period last year.
Poly Vinyl Chloride (PVC) and Vinyl Chloride Monomer (VCM) prices remained high initially but began to declinein mid-August due to the beginning of a recessionary trend affecting majority of the world economies. InternationalPVC prices fell from a peak of US$1270 per ton in July to US $995 in September. The PVC-VCM margin alsodeclined due to sharply dropping PVC prices.
The Profit after tax for 3Q 2008 was Rs.159 million as compared to Rs.126 million for 3Q 2007 and that for thenine months ended September 2008 was Rs. 586 million as against Rs. 308 million for corresponding period lastyear. The increase in profit was attributable to strong PVC-VCM margin.
Company’s expansion project for increasing PVC capacity by 50 thousand tons is as per schedule and is undercommissioning phase. The overall back integration project is also as per schedule and will come online by end ofsecond quarter 2009.
Near Future Outlook
Due to ongoing turmoil in global economies, international prices of PVC and VCM have significantly declined havinga negative impact on margins. The profitability in 4Q 2008 will be substantially under pressure due to compressionof PVC-VCM margin and high value inventory. In addition the ongoing power crisis and tight cash liquidity may alsoaggravate and result in lower domestic consumption of PVC resin.
Asif Qadir Masaharu DomichiPresident & Chief Executive Director
KarachiOctober 21, 2008
4
UNAUDITED CONDENSEDINTERIM FINANCIAL STATEMENTSFOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
ENGRO POLYMER & CHEMICALS LIMITED(Formerly ENGRO ASAHI POLYMER & CHEMICALS LIMITED)CONDENSED INTERIM BALANCE SHEET (UNAUDITED)AS AT SEPTEMBER 30, 2008
(Audited)December 31,
2007September 30,
2008
Rupees
45
6
7
8
9
1011
12
13
14
Note
12,406,829 7,41950,000
119,632 12,583,880
106,279 1,294,137
250,962 163,202 36,262 39,750
1,208,642 249,904
3,349,138
15,933,018
5,203,677 974,003 38,512 9,625
648,773 6,874,590
– 6,874,590
5,306,877 428,268 485,935
6,221,080
60,000 –
354,022 2,349,876
73,450 2,837,348
15,933,018
4,708,761 6,91450,000 96,971
4,862,646
95,719 919,455 178,472 253,361 38,012
– 2,914,504
200,844 4,600,367
9,463,013
4,436,000 425,216
––
315,603 5,176,819
1,054,353 6,231,172
1,370,000 –
357,198 1,727,198
60,000 35,429
– 1,409,214
–1,504,643
9,463,013
Nine Months Report – September 2008
5
ASSETS
Non-Current Assets
Property, plant and equipmentIntangible assetsLong term investmentLong term loans and advances
Current Assets
Stores and sparesStock-in-trade Trade debts - considered good, secured Loans, advances, deposits, prepayments and other receivables Tax recoverableDerivative financial instrumentShort term investmentsCash and bank balances
TOTAL ASSETS
EQUITY AND LIABILITIES
Share capital Share premiumHedging reserveCompensation reserveUnappropriated profit
Advance Against Issue of Share Capital
Non-Current Liabilities
Long term finances and morabahas Retention money against project paymentsDeferred liabilities
Current Liabilities
Current portion of - long term finances and morabahas - long term loanShort term borrowingTrade and other payablesProvisions
Contingencies and Commitments
TOTAL EQUITY AND LIABILITIES
The annexed notes 1 to 21 form an integral part of these condensed interim financial information.
Asif Qadir Masaharu DomichiPresident & Chief Executive Director
(Amounts in thousand)
Nine Months Report – September 2008
6
ENGRO POLYMER & CHEMICALS LIMITED(Formerly ENGRO ASAHI POLYMER & CHEMICALS LIMITED)CONDENSED INTERIM PROFIT AND LOSS ACCOUNT (UNAUDITED)FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
Note
15
16
17
Nine Monthsended
Sep. 30, 2008
Nine Monthsended
Sep. 30, 2007
Quarterended
Sep. 30, 2008
Quarterended
Sep. 30, 2007
Rupees
Rupees
Net sales
Cost of sales
Gross profit
Distribution and marketing expenses
Administrative expenses
Other operating expenses
Other operating income
Operating profit
Finance costs
Profit before taxation
Taxation
Profit for the period
Earnings per share - basic and diluted
The annexed notes 1 to 21 form an integral part of these condensed interim financial information.
6,536,068
(5,190,710)
1,345,358
(229,771)
(120,794)
(269,867)
133,027
857,953
(21,624)
836,329
(250,263)
586,066
1.13
4,684,630
(3,992,226)
692,404
(179,480)
(62,330)
(36,081)
74,356
488,869
(31,412)
457,457
(149,899)
307,558
1.46
2,167,314
(1,733,610)
433,704
(80,480)
(51,155)
(137,776)
44,607
208,900
(6,064)
202,836
(43,865)
158,971
0.31
1,668,869
(1,404,711)
264,158
(63,475)
(20,508)
(14,921)
38,117
203,371
(9,189)
194,182
(67,966)
126,216
0.46
Asif Qadir Masaharu DomichiPresident & Chief Executive Director
(Amounts in thousand except for earnings per share)
Nine Months Report – September 2008
7
ENGRO POLYMER & CHEMICALS LIMITED(Formerly ENGRO ASAHI POLYMER & CHEMICALS LIMITED)CONDENSED INTERIM STATEMENT OF CHANGES IN EQUITY (UNAUDITED)FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
Rupees
Balance as at December 31, 2006 / January 1, 2007
Issue of Share Capital
Profit for the nine months ended Sep. 30, 2007
Dividends
- 1st interim - Re. 0.33 per share - 2nd interim - Re. 1.00 per share - 3rd interim - Re. 0.77 per share
Balance as at Sep. 30, 2007 / Oct. 1, 2007
Profit for the three months ended December 31, 2007
Issue of Share Capital
Share issuance cost, net
Balance as at December 31, 2007 / January 1, 2008 (audited)
Final dividend for the year ended December 31, 2007 - Re. 0.54 per share
Profit for the nine months ended Sep. 30, 2008
Issue of Share Capital
Share issuance cost, net
Effective portion of changes in fair value of cash flow hedge - net
ESOS Compensation Reserve
Balance as at September 30, 2008
The annexed notes 1 to 21 form an integral part of these condensed interim financial information.
Asif Qadir Masaharu DomichiPresident & Chief Executive Director
Issued,subscribedand paid-up
capital
1,780,000
1,894,000
–
– – –
–
3,674,000
–
762,000
–
4,436,000
–
–
767,677
–
–
–
5,203,677
Sharepremium
–
–
–
– – –
–
–
–
457,200
(31,984)
425,216
–
–
614,141
(65,354)
–
–
974,003
Hedgingreserve
–
–
–
– – –
–
–
–
–
–
–
–
–
–
–
38,512
–
38,512
Employeeshare
CompensationReserve
–
–
–
– – –
–
–
–
–
–
–
–
–
–
–
–
9,625
9,625
Unappropriatedprofit
267,827
–
307,558
(58,740) (178,000) (137,060)
(373,800)
201,585
114,018
–
–
315,603
(252,896)
586,066
–
–
–
–
648,773
Total
2,047,827
1,894,000
307,558
(58,740) (178,000) (137,060)
(373,800)
3,875,585
114,018
1,219,200
(31,984)
5,176,819
(252,896)
586,066
1,381,818
(65,354)
38,512
9,625
6,874,590
(Amounts in thousand)
Nine Months Report – September 2008
8
ENGRO POLYMER & CHEMICALS LIMITED(Formerly ENGRO ASAHI POLYMER & CHEMICALS LIMITED)CONDENSED INTERIM CASH FLOW STATEMENT (UNAUDITED)FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
18
Note
Nine monthsended
Sep. 30, 2007
Nine monthsended
Sep. 30, 2008
RupeesCASH FLOWS FROM OPERATING ACTIVITIES
Cash generated from operationsFinance costs paidLong term loans and advancesRetention money against project paymentsProvisionsIncome tax paid
Net cash inflow from operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipmentPurchases of intangible assetsProceeds on disposal of operating assetsShort term investments - netReturn on balances with banks / TFC / US Dollar Bonds
Net cash outflow from investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long term financeRepayment of long term financeProceeds from issue of Share CapitalShare issuance cost - netRepayments of: - long term finances and morabahas - long term loanShort term borrowingsDividend paid
Net cash inflow from financing activities
Net increase in cash and cash equivalentsCash and cash equivalents at beginning of the period
Cash and cash equivalents at end of the period
The annexed notes 1 to 21 form an integral part of these condensed interim financial information.
1,405,248) (54,270) (22,661) 428,268)
73,450) (129,862)
1,700,173)
(7,665,156) (993)
1,236) 1,705,862
43,253) )
(5,915,798))
5,306,877) (1,340,000)
327,465) (65,354)
(30,000) (35,429)
354,022 (252,896)
4,264,685
49,060) 200,844)
249,904)
1,031,498) (47,718)
(145,638) –) –)
(21,282)
816,860)
(1,748,516) (3,926) 1,540) –
46,468) )
(1,704,434)
1,160,000) (50,000)
1,894,000) –
– (69,737)
(376,570) (422,038)
2,135,655
1,248,081) 432,315)
1,680,396)
Asif Qadir Masaharu DomichiPresident & Chief Executive Director
(Amounts in thousand)
Nine Months Report – September 2008
9
ENGRO POLYMER & CHEMICALS LIMITED(Formerly ENGRO ASAHI POLYMER & CHEMICALS LIMITED)NOTES TO THE CONDENSED INTERIM FINANCIAL STATEMENTS (UNAUDITED)FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
1. LEGAL STATUS AND OPERATIONS
1.1 The Company was incorporated in Pakistan in 1997 under the Companies Ordinance 1984. In July 2008, the Companywas listed on Karachi Stock Exchange.
1.2 The Company is a subsidiary of Engro Chemical Pakistan Limited. The address of its registered office is 1st Floor, BahriaComplex I, M. T. Khan Road, Karachi. The Company’s principal activity is to manufacture, market and sell Poly VinylChloride (PVC), PVC compounds and other related chemicals.
1.3 In 2006, the Company commenced work on its expansion plan in respect of its existing capacity and backward integrationproject (the Project). The project’s total cost is estimated at US $ 240,000, which includes construction of Ethylene DiChloride, Vinyl Chloride Monomer (VCM), Chlor Alkali and Power Utilities plants. The new plants are being setup adjacentto the Company’s existing PVC facilities in the Port Qasim Industrial Area.
2. STATEMENT OF COMPLIANCE
These condensed interim financial statements are unaudited and are being submitted to the shareholders in accordancewith section 245 of the Companies Ordinance, 1984 and have been presented in condensed form in accordance with therequirements of International Accounting Standard 34 – ‘Interim Financial Reporting’.
3. ACCOUNTING POLICIES
The accounting policies adopted in the preparation of these condensed interim financial statements are the same as thoseapplied in the preparation of the audited annual financial statements of the Company for the year ended December 31,2007, except for the following accounting policy in respect of derivative financial instruments and hedging as well asemployee share option scheme adopted during the period ended September 30, 2008.
Derivatives financial instruments and hedging activities
Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequentlyremeasured at their fair value. The method of recognising the resulting gain or loss depends on whether the derivative isdesignated as a hedging instrument, and if so, the nature of the item being hedged. The Company designates certainderivatives as either:
(a) hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value hedge); or
(b) hedges of a particular risk associated with a recognised asset or liability or a highly probable forecast transaction (cash flow hedge).
The overall risk management strategy includes reasons for undertaking hedge transactions and entering into derivatives.The objectives of this strategy are to:
– minimize foreign currency exposure’s impact on the Company’s financial performance; and
– protect the Company’s cash flow from adverse movements in foreign currency exchange rates.
(a) Fair value hedge
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the profit and loss account, together with any changes in the fair value of the hedged asset or liability that areattributable to the hedged risk.
(Amounts in thousand)
(b) Cash flow hedge
On an ongoing basis, the Company assesses whether each derivative continues to be highly effective in offsettingchanges in the cash flows of hedged items. If and when a derivative is no longer expected to be highly effective,hedge accounting is discontinued.
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedgesis recognised in equity. The gain or loss relating to the ineffective portion is recognised immediately in the profitand loss account or the cost of the related non-financial asset (for e.g. inventory or fixed assets), as applicable.
Amounts accumulated in equity are reclassified to the profit and loss account in the periods when the hedgeditem affects profit or loss account i.e. when the transaction occurs. The gain or loss relating to the effectiveportion of interest rate swaps hedging variable rate borrowings is recognised in the profit and loss account orthe cost of the related asset for which the borrowing is being utilised. However, when the forecast transactionthat is hedged results in the recognition of a non-financial asset (for e.g. inventory or fixed assets) the gainsand losses previously deferred in equity are transferred from equity and included in the initial measurement ofthe cost of the asset. The deferred amounts are ultimately recognised in cost of goods sold in case of inventoryor in depreciation in case of fixed assets.
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, anycumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transactionis ultimately recognised in the profit and loss account or the cost of the related non-financial asset (for e.g. inventory orfixed assets) as applicable. When a forecast transaction is no longer expected to occur, the cumulative gain or loss thatwas reported in equity is immediately transferred to the profit and loss account.
The fair values of various derivative instruments used for hedging purposes are disclosed in note 10. Movements on thehedging reserve are shown in statement of changes in equity. The full fair value of a hedging derivative is classified as anon-current asset or liability when the remaining maturity of hedged item is more than 12 months, and as a current assetor liability when the remaining maturity of the hedged item is less than 12 months. Trading derivatives are classified as acurrent asset or liability.
Employees’ Share Option Scheme
The grant date fair value of equity settled share based payments to employees is initially recognised in the balance sheetas deferred employee compensation expense with a consequent credit to equity as deferred employee compensation reserve.
The fair value determined at the grant date of the equity settled share based payments is recognised as an employeecompensation expense on a straight line basis over the vesting period.
When an unvested option lapses by virtue of an employee not conforming to the vesting conditions after recognition of anemployee compensation expense in profit or loss, employee compensation expense in profit or loss will be reversed equalto the amortised portion with a corresponding effect to deferred employee compensation reserve in the balance sheet.
When a vested option lapses on expiry of the exercise period, employee compensation expense already recognised in theprofit or loss is reversed with a corresponding reduction to deferred employee compensation reserve in the balance sheet.
When the options are exercised, deferred employee compensation reserve relating to these options is transferred to sharecapital and share premium account. An amount equivalent to the face value of related shares is transferred to share capital. Any amount over and above the share capital is transferred to share premium account.
4. PROPERTY, PLANT AND EQUIPMENTUnaudited Audited
September 30, December 31,2008 2007
Rupees
Operating fixed assets - note 4.1 and 4.2 2,018,951 2,133,053
Capital work-in-progress
- the project - note 4.3` 10,363,144 2,565,400
- others 24,734 10,308
10,387,878 2,575,708
12,406,829 4,708,761
Nine Months Report – September 2008
10
(Amounts in thousand)
Nine Months Report – September 2008
11
4.1. Capitalisation of operating assets during
the period / year were as follows:
Unaudited AuditedSeptember 30, December 31,
2008 2007Rupees
Leasehold land 3,346 8,550
Furniture, fittings and office equipment 13,728 12,660
Vehicles 11,349 18,770
28,423 39,980
4.2 During the period:
– assets costing Rs.1,725, having a net book value of Rs. 1,351, were disposed off for Rs. 1,236; and
– assets costing Rs. 3,298 having a net book value of Rs. 243, were written off, resulting due to an independent physicalverification exercise carried out during the period.
4.3 Cost capitalised todate relating to the Project:
Unaudited AuditedSeptember 30, December 31,
2008 2007Rupees
Plant and machinery 9,171,235 1,923,749
Building on leasehold land 140,084 100,650
Other ancillary costs - note 4.3.1 778,954 341,736
Ethylene pipeline and power cables 56,615 30,250
Water and gas pipelines 216,256 169,015
10,363,144 2,565,400
4.3.1 Other ancillary costs, directly attributable to the Project, capitalised todate, are as follows:
Unaudited AuditedSeptember 30, December 31,
2008 2007Rupees
Salaries, wages and benefits 245,376 92,989
Legal and professional charges 46,371 21,945
Training and travelling expense 70,166 45,590
Borrowing costs, including mark-up on finances
capitalised 301,320 134,431
Bank Charges 31,825 1,766
Depreciation 11,259 5,269
Others 72,637 39,746
778,954 341,736
(Amounts in thousand)
7. LOANS, ADVANCES, DEPOSITS, PREPAYMENTS AND OTHER RECEIVABLES
Included in other receivables is an amount representing custom duty refundable of Rs. 18,043. During the period, theCollector of Customs issued an order dated April 11, 2008, disposing off the refund applications filed by the Company forthe refund of this duty paid at import stage. The Company based on the advice of its tax consultant, has filed an appealbefore the Collector of Customs (Appeals), Karachi dated May 31, 2008 against the aforementioned order. However, theCompany on basis of prudence has made provision against the aforementioned refundable amount in these financialstatements.
Nine Months Report – September 2008
12
9. SHARE CAPITAL
During the period the Company issued 76,767,677 ordinary shares of Rs. 10 each at a subscription price of Rs.18 pershare to various investors. Of this JS Global Capital Limited (JS Global), one of the investors, made available 50 millionordinary shares out of its total shareholding in the Company to the general public through listing at the Karachi StockExchange under an Offer for Sale dated May 31, 2008. The Company was listed on Karachi Stock Exchange in July 2008.
10. HEDGING RESERVE
Hedging reserve mainly represents the effective portion of changes in the fair values of designated cash flow hedges.
During the period, the Company purchased forward exchange contracts having various maturity dates to hedge its Dollarcurrency exposure of US $ 71,152 representing the anticipated cash outflows for the Project payments and financing.
5. INTANGIBLE ASSETS
Additions made during the period amounted to Rs. 1,055 (December 31, 2007: Rs. 2,785).
Unaudited AuditedSeptember 30, December 31,
2008 2007 Rupees
6. STOCK-IN-TRADE
Raw and packing materials 691,486 256,277
Work-in-progress 18,178 22,861
Finished goods
- own manufactured product 584,473 640,170
- purchased product – 147
584,473 640,317
1,294,137 919,455
Unaudited AuditedSeptember 30, December 31,
2008 2007 Rupees
8. CASH AND BANK BALANCES
Cash in hand 935 834
Cash at bank on
- current accounts 8,598 97,072
- saving accounts 240,371 102,938
248,969 200,010
249,904 200,844
(Amounts in thousand)
Nine Months Report – September 2008
13
At period end, the Company owned forward exchange contracts to purchase US $ 30,000 at various maturitydates. The fair values of these contracts amounted to Rs. 81,000 at period end.
11. EMPLOYEES’ SHARE COMPENSATION RESERVE
The employees' share option scheme (the Scheme) was originally approved by the shareholders in their ExtraordinaryGeneral Meeting (EGM) held on October 8, 2007. According to the scheme, senior employees who are critical to thebusiness operations, shall be granted options to purchase five million three hundred thousand newly issued ordinary sharesat an exercise price of Rs. 22 per ordinary share. The number of options granted is calculated in accordance with the abilityand criticality of employee to the business, subject to approval by the Compensation Committee. The options carry neitherright to dividends nor voting rights. Vesting period shall start from the date of grant and shall end on December 31, 2009,where after the options can be exercised within a period of two years. Future employees who join by October 31, 2008and those who are promoted by the same date, may also be granted options, however, the length of vesting period shallbe the same as enjoyed by first recipients of options.
During the period, the Company proposed certain changes relating to "date of grant" in the originally approved scheme.In September 2008, Securities and Exchange Commission of Pakistan approved the amendment as approved by shareholdersin their EGM held on June 27, 2008.
The effect of grant of share options has been incorporated in these condensed interim financial statements. The amountsrecognised in profit and loss account and balance sheet are as follows:
(Rupees)Employees’ share option compensation reserve and deferred employee
compensation expense recognised on grant date 9,625
Less: Amortisation for the period October 8, 2007 to September 30, 2008 4,278
Closing balance as on September 30, 2008 5,347
The Company used Black Scholes pricing model to calculate the fair value of share options at the grant date.The fair value of the share options as per the model and underlying assumptions are as follows:
Total number of share options issued 5,175Fair value of the share options at grant date Rs. 1.86Share price at grant date Rs. 18Exercise price Rs. 22Annual Volatility 15.13%Risk free rate used 10.12%
12. LONG TERM FINANCES AND MORABAHAS
12.1 The Company entered into a Syndicated Term Finance Agreement on October 12, 2007 for Rs. 5,700,000.The facility is repayable in seventeen semi-annual installments commencing 30 months after May 9, 2008, theeffective date. The facility carries mark-up at the rate of 2.25% over six months Karachi Inter Bank Offered Rate(KIBOR) and monitoring fee of Rs. 700 per annum. Commitment fee at the rate of 0.15% per annum isalso payable on that part of the finance that has not been drawn. During the period, Company has drawn downRs. 3,200,000 against the facility.
Transaction costs amounting to Rs. 108,311 have been netted-off against the drawn amount of finance, as per policy.
12.2 During the period, on February 15, 2008, the Company repaid the bridge finance facility amounting to Rs. 1,240,000.This facility was arranged to meet the intermediate funding requirements of the Project.
12.3 The Company, effective June 21, 2007, entered into a loan agreement with the International Finance Corporation(IFC) consisting of:
i) Loan A, amounting to US $ 30,000; and
ii) Loan B, amounting to US $ 30,000.
The loans, obtained to finance the Project referred to in note 1.3, carry an interest at the rate 2.6% to 3% above 6 monthsLIBOR with a commitment fee at the rate of 0.50% per annum on that part of the loan that has not been disbursed. Theloans are to be repaid in fifteen half yearly installments commencing from June 15, 2010.
(Amounts in thousand)
13. PROVISIONS
The Company has paid Rs. 73,450 on account of Special Excise Duty (SED) on import of plant and machinery for theProject. The Company has adjusted this SED in the monthly sales tax returns against SED on goods produced and soldby the Company. The Company has approached Federal Board of Revenue (FBR) to obtain clarification in respect of theadjustment of SED made by the Company in monthly sales tax return. Pending such clarification, the Company,based on prudence, has made provision of the aforementioned SED in these financial statements.
14. CONTINGENCIES AND COMMITMENTS
14.1 Commitments
– Performance guarantees issued by banks on behalf of the Company as at September 30, 2008 amounted to Rs. 264,281 (December 31, 2007: Rs. 301,431).
– Contracts signed in respect of capital expenditure for the Project, but not executed as at September 30, 2008amounted to Rs. 3,706,784 (December 31, 2007 Rs. 7,897,193).
Nine Months Report – September 2008
14
Nine Months Nine Months Quarter Quarterended ended ended ended
Sep. 30, 2008 Sep. 30, 2007 Sep. 30, 2008 Sep. 30, 2007 Rupees
Opening stock of work-in-progress 22,861 16,051 14,018 13,553
Raw and packing materials consumed 4,656,691 3,171,583 1,844,959 1,180,594Salaries, wages and staff welfare 75,752 78,587 28,301 28,470Fuel, power and gas 113,566 100,072 46,388 33,103Repairs and maintenance 9,663 12,505 4,932 1,630Depreciation 125,879 126,508 41,932 42,303Consumable stores 14,191 22,131 5,351 3,938Purchased services 14,730 16,558 5,022 8,476Storage and handling 100,570 94,344 36,332 34,413Training and travelling expenses 6,469 6,879 3,973 2,750Communication, stationery and other office expenses 1,890 1,183 1,157 299Insurance 7,306 11,637 2,443 3,328Other expenses 2,386 4,180 190 291
5,129,093 3,646,167 2,020,980 1,339,595
Closing stock of work-in-progress (18,178) (16,175) (18,178) (16,175)
Cost of goods manufactured 5,133,776 3,646,043 2,016,820 1,336,973
Opening stock of finished goods 640,170 588,065 300,173 310,125Closing stock of finished goods (584,473) (242,387) (584,473) (242,387)
55,697 345,678 (284,300) 67,738
Cost of goods sold - own manufactured product 5,189,473 3,991,721 1,732,520 1,404,711 - purchased product 1,237 505 1,089
5,190,710 3,992,226 1,733,609 1,404,711
–
–
15. COST OF SALES
(Amounts in thousand)
Nine Months Report – September 2008
15
17.1 Expenses directly attributable to the Project have been capitalised, as referred to in note 4.3.
Nine Months Nine Months Quarter Quarterended ended ended ended
Sep. 30, 2008 Sep. 30, 2007 Sep. 30, 2008 Sep. 30, 2007 Rupees
16. DISTRIBUTION AND MARKETING EXPENSES
Salaries, wages and staff welfare 31,537 28,796 12,457 10,896Advertising, sales promotion and entertainment 21,652 16,784 5,940 6,332Product transportation and handling 152,665 112,692 54,134 38,889Rent, rates and taxes 3,569 3,454 1,818 851Purchased services 6,649 4,875 2,302 1,393Insurance 646 219 292 89Depreciation 3,090 3,014 1,098 972Training and travelling expenses 6,126 5,574 2,112 1,937Communication, stationery and other office expenses 1,817 2,181 (9) 1,196Other expenses 2,020 1,891 336 920
229,771 179,480 80,480 63,475
17. ADMINISTRATIVE EXPENSES
Salaries, wages and staff welfare 68,170 35,060 28,520 11,802Rent, rates and taxes 9,414 6,115 3,930 2,307Purchased services 8,731 5,284 4,474 1,926Insurance 152 36 108 12Depreciation - note 17.1 4,374 2,813 1,349 1,013Amortisation Training and travelling expenses 13,506 7,606 5,100 2,117Communication, stationery and other office expenses 7,264 3,476 3,983 1,156Other expenses 9,183 1,940 3,691 175
120,794 62,330 51,155 20,508
– – – –
(Amounts in thousand)
Nine Months Report – September 2008
16
Nine Months Nine Monthsended ended
Sep, 30, 2008 Sep, 30, 2007Rupees
18. CASH GENERATED FROM OPERATIONS
Profit before taxation 836,329 457,457
Adjustments for non cash chargesand other items:
Provision for staff retirement and other service benefits 8,336 3,591 Depreciation 132,856 132,176 Employee share compensation expenses 9,625 Amortisation 488 49 Income on deposits / TFC / US Dollar Bonds (42,434) (49,033)Finance costs 21,624 31,412 Loss on disposal/ write off of operating assets (358) (176)Operating assets written off 243 Working capital changes - note 18.1 438,539 456,022
1,405,248 1,031,498
18.1 Working capital changes
Decrease / (Increase) in current assets
Stores and spares (10,560) (2,815) Stock-in-trade (374,682) 485,122 Trade debts (72,490) (67,573)
Loans, advances, deposits, prepayments and other receivables (net) 89,852 13,254
(367,880) 427,988
Increase in current liabilities
Trade and other payables 806,419 28,034438,539 456,022
–
–
(Amounts in thousand)
Nine Months Report – September 2008
17
19. TRANSACTIONS WITH RELATED PARTIES
Sales, purchases and other transactions with related parties are carried out on commercial terms and conditions.Following transactions were carried out with related parties during the period:
20. DATE OF AUTHORISATION FOR ISSUE
These condensed interim financial statements were authorised for issue on October 21, 2008 by the Board of Directorsof the Company.
21. CORRESPONDING FIGURES
Corresponding figures in the balance sheet and statement of changes in equity comprise of balances as per the annualaudited financial statements for the year ended December 31, 2007, whereas corresponding figures in the profit and lossaccount and cash flow statement comprise of balances of comparable period as per the condensed interim financialstatements for the nine months ended September 30, 2007.
Nine Months Nine Monthsended ended
Sep. 30, 2008 Sep. 30, 2007
Rupees
Holding Company Purchase of services 9,971 3,688Sale of services 1,831 2,277Sale of steam and electricity 25,397 26,816Use of operating assets 765 1,639Pension fund contribution 2,208 1,620Provident fund contribution 3,322 2,430
Associated Companies Purchase of goods 4,707,808 3,240,723Sale of goods 78,648 111
Subsidiary Company Purchase of goods 1,089 –Reimbursements 23 –
Related parties by virtue ofcommon directorshipPurchase of goods 1,577 –Purchase of services 110,152 94,816Sale of services 1,256 –Insurance 458 1,443Directors fee 10 –Reimbursements 71 –
Key management personnelManagerial remuneration 85,824 63,605Retirement benefits 5,737 4,201Other benefits 45,598 29,588
Number of employees 45 37
Asif Qadir Masaharu DomichiPresident & Chief Executive Director
(Amounts in thousand)
18
and its subsidiary company
UNAUDITED CONDENSED CONSOLIDATEDINTERIM FINANCIAL STATEMENTSFOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
ENGRO POLYMER & CHEMICALS LIMITED(Formerly ENGRO ASAHI POLYMER & CHEMICALS LIMITED)AND ITS SUBSIDIARY COMPANYCONDENSED CONSOLIDATED INTERIM BALANCE SHEET (UNAUDITED)AS AT SEPTEMBER 30, 2008 (Audited)
December 31,2007
September 30,2008
Rupees
45
6
7
8
9
1011
12
13
14
Note
Non-Current Assets
Property, plant and equipmentIntangible assetsLong term loans and advances
Current Assets
Stores and sparesStock-in-trade Trade debts - considered good, secured Loans, advances, deposits, prepayments and other receivables Tax recoverableDerivative financial instrumentShort term investmentsCash and bank balances
TOTAL ASSETS
EQUITY AND LIABILITIES
Share capital Share premiumHedging reserveCompensation reserveUnappropriated profit
Advance Against Issue of Share Capital
Non-Current Liabilities
Long term finances and morabahas Retention money against project paymentsDeferred liabilities
Current Liabilities
Current portion of - long term finances and morabahas - long term loanShort term borrowingTrade and other payablesProvisions
Contingencies and Commitments
TOTAL EQUITY AND LIABILITIES
The annexed notes 1 to 21 form an integral part of these condensed interim financial information.
12,406,829 7,419
119,633 12,533,881
106,279 1,294,292
250,962 166,576 36,230 39,750
1,208,642 300,876
3,403,607
15,937,488
5,203,677 974,003 38,512 9,625
652,892 6,878,709
– 6,878,709
5,306,877 428,268 485,934
6,221,079
60,000 –
354,022 2,350,228
73,450 2,837,700
15,937,488
4,708,761 6,914
96,971 4,812,646
95,719 920,139 178,472 256,944
37,911–
2,914,504 247,856
4,651,545
9,464,191
4,436,000 425,216
––
316,412 5,177,628
1,054,353 6,231,981
1,370,000 –
357,198 1,727,198
60,000 35,429
– 1,409,583
–1,505,012
9,464,191
Nine Months Report – September 2008
19
ASSETS
Asif Qadir Masaharu DomichiPresident & Chief Executive Director
(Amounts in thousand)
Nine Months Report – September 2008
20
ENGRO POLYMER & CHEMICALS LIMITED(Formerly ENGRO ASAHI POLYMER & CHEMICALS LIMITED)AND ITS SUBSIDIARY COMPANYCONDENSED CONSOLIDATED INTERIM PROFIT AND LOSS ACCOUNT (UNAUDITED)FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
Note
15
16
17
Nine Monthsended
Sep. 30, 2008
Nine Monthsended
Sep. 30, 2007
Quarterended
Sep. 30, 2008
Quarterended
Sep. 30, 2007
Rupees
Rupees
Net sales
Cost of sales
Gross profit
Distribution and marketing expenses
Administrative expenses
Other operating expenses
Other operating income
Operating profit
Finance costs
Profit before taxation
Taxation
Profit for the period
Earnings per share - basic and diluted
The annexed notes 1 to 21 form an integral part of these condensed interim financial information.
6,536,068
(5,189,061)
1,347,007
(229,771)
(120,892)
(271,078)
135,999
861,265
(21,626)
839,639
(250,263)
589,376
1.14
4,691,457
(3,999,392)
692,065
(179,664)
(62,508)
(36,081)
74,356
488,168
(31,419)
456,749
(149,933)
306,816
1.45
2,167,314
(1,732,521)
434,793
(80,480)
(51,155)
(137,776)
45,466
210,848
(6,065)
204,783
(43,865)
160,918
0.31
1,668,869
(1,404,710)
264,159
(63,475)
(20,508)
(14,921)
38,117
203,372
(9,190)
194,182
(67,996)
126,186
0.46
Asif Qadir Masaharu DomichiPresident & Chief Executive Director
(Amounts in thousand except for earnings per share)
Nine Months Report – September 2008
21
ENGRO POLYMER & CHEMICALS LIMITED(Formerly ENGRO ASAHI POLYMER & CHEMICALS LIMITED)AND ITS SUBSIDIARY COMPANYCONDENSED CONSOLIDATED INTERIM STATEMENT OF CHANGES IN EQUITY (UNAUDITED)FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
Rupees
Balance as at December 31, 2006 / January 1, 2007
Rights Issue
Profit for the nine months ended Sep. 30, 2007
Dividends
- 1st interim - Re. 0.33 per share - 2nd interim - Re. 1.00 per share - 3rd interim - Re. 0.77 per share
Balance as at Sep. 30, 2007 / Oct. 1, 2007
Profit for the three months ended December 31, 2007
Issue of Share Capital
Share issuance cost, net
Balance as at December 31, 2007 / January 1, 2008 (audited)
Final dividend for the year ended December 31, 2007 - Re. 0.54 per share
Profit for the nine months ended Sep. 30, 2008
Issue of Share Capital
Share issuance cost, net
Effective portion of changes in fair value of cash flow hedge - net
ESOS Compensation Reserve
Balance as at September 30, 2008
The annexed notes 1 to 21 form an integral part of these condensed interim financial information.
Asif Qadir Masaharu DomichiPresident & Chief Executive Director
Issued,subscribedand paid-up
capital
1,780,000
1,894,000
–
– – –
–
3,674,000
–
762,000
–
4,436,000
–
–
767,677
–
–
–
5,203,677
Sharepremium
–
–
–
– – –
–
–
–
457,200
(31,984)
425,216
–
–
614,141
(65,354)
–
–
974,003
Hedgingreserve
–
–
–
– – –
–
–
–
–
–
–
–
–
–
–
38,512
–
38,512
ESOSCompensation
Reserve
–
–
–
– – –
–
–
–
–
–
–
–
–
–
–
–
9,625
9,625
Unappropriatedprofit
268,530
–
306,816
(58,740) (178,000) (137,060)
(373,800)
201,546
114,866
–
–
316,412
(252,896)
589,376
–
–
–
–
652,892
Total
2,048,530
1,894,000
306,816
(58,740) (178,000) (137,060)
(373,800)
3,875,546
114,866
1,219,200
(31,984)
5,177,628
(252,896)
589,376
1,381,818
(65,354)
38,512
9,625
6,878,709
(Amounts in thousand)
Nine Months Report – September 2008
22
ENGRO POLYMER & CHEMICALS LIMITED(Formerly ENGRO ASAHI POLYMER & CHEMICALS LIMITED)AND ITS SUBSIDIARY COMPANYCONDENSED CONSOLIDATED INTERIM CASH FLOW STATEMENT (UNAUDITED)FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
18
Note
Nine Monthsended
Sep. 30, 2007
Nine Monthsended
Sep. 30, 2008
RupeesCASH FLOWS FROM OPERATING ACTIVITIES
Cash generated from operationsFinance costs paidLong term loans and advancesRetention money against project paymentsProvisionsIncome tax paid
Net cash inflow from operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipmentPurchases of intangible assetsProceeds on disposal of operating assetsShort term investments - netReturn on balances with banks / TFC / US Dollar Bonds
Net cash outflow from investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long term financeRepayment of long term financeProceeds from issue of Share CapitalShare issuance cost - netRepayments of: - long term finances and morabahas - long term loanShort term borrowingsDividend paid
Net cash inflow from financing activities
Net increase in cash and cash equivalentsCash and cash equivalents at beginning of the period
Cash and cash equivalents at end of the period
The annexed notes 1 to 21 form an integral part of these condensed interim financial information.
1,406,237) (54,270)
(22,661) 428,268)
73,450) (129,862)
1,701,162)
(7,665,156) (993)
1,236) 1,705,861
46,225) )
(5,912,827))
5,306,877) (1,340,000)
327,465) (65,354)
(30,000) (35,429)
354,022 (252,896)
4,264,685
53,020) 247,856)
300,876)
1,038,214) (47,725)
(145,641) –) –)
(21,278)
823,570)
(1,748,519) (3,926) 1,540) –
46,468) )
(1,704,437)
1,160,000) (50,000)
1,894,000) –
– (69,737)
(376,570) (422,038)
2,135,655
1,254,788) 471,897)
1,726,685)
Asif Qadir Masaharu DomichiPresident & Chief Executive Director
(Amounts in thousand)
Nine Months Report – September 2008
23
ENGRO POLYMER & CHEMICALS LIMITED(Formerly ENGRO ASAHI POLYMER & CHEMICALS LIMITED)AND ITS SUBSIDIARY COMPANYNOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
1. LEGAL STATUS AND OPERATIONS
1.1 The Group consists of Engro Polymer and Chemicals Limited (Formerly Engro Asahi Polymer and Chemicals Limited) (theCompany) and its wholly owned subsidiary company, Engro Polymer Trading (Private) Limited [Formerly Engro AsahiTrading (Private) Limited].
1.2 The Company is a subsidiary of Engro Chemical Pakistan Limited. The address of its registered office is 1st Floor, BahriaComplex I, M. T. Khan Road, Karachi. The Company’s principal activity is to manufacture, market and sell Poly VinylChloride (PVC), PVC compounds and other related chemicals.
1.3 In 2006, the Company commenced work on its expansion plan in respect of its existing capacity and backward integrationproject (the Project). The project’s total cost is estimated at US $ 240,000, which includes construction of Ethylene DiChloride, Vinyl Chloride Monomer (VCM), Chlor Alkali and Power Utilities plants. The new plants are being setup adjacentto the Company’s existing PVC facilities in the Port Qasim Industrial Area.
2. STATEMENT OF COMPLIANCE
These condensed interim financial statements are unaudited and are being submitted to the shareholders in accordancewith section 245 of the Companies Ordinance, 1984 and have been presented in condensed form in accordance with therequirements of International Accounting Standard 34 – ‘Interim Financial Reporting’.
3. ACCOUNTING POLICIES
The accounting policies adopted in the preparation of these condensed interim financial statements are the same as thoseapplied in the preparation of the audited annual financial statements of the Company for the year ended December 31,2007, except for the following accounting policy in respect of derivative financial instruments and hedging as well asemployees share option scheme adopted during the period ended September 30, 2008.
Derivatives financial instruments and hedging activities
Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequentlyremeasured at their fair value. The method of recognising the resulting gain or loss depends on whether the derivative isdesignated as a hedging instrument, and if so, the nature of the item being hedged. The Company designates certainderivatives as either:
(a) hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value hedge); or
(b) hedges of a particular risk associated with a recognised asset or liability or a highly probable forecast transaction (cash flow hedge).
The overall risk management strategy includes reasons for undertaking hedge transactions and entering into derivatives.The objectives of this strategy are to:
– minimize foreign currency exposure’s impact on the Company’s financial performance; and
– protect the Company’s cash flow from adverse movements in foreign currency exchange rates.
(a) Fair value hedge
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the profit and loss account, together with any changes in the fair value of the hedged asset or liability that areattributable to the hedged risk.
(Amounts in thousand)
(b) Cash flow hedge
On an ongoing basis, the Company assesses whether each derivative continues to be highly effective in offsettingchanges in the cash flows of hedged items. If and when a derivative is no longer expected to be highly effective,hedge accounting is discontinued.
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedgesis recognised in equity. The gain or loss relating to the ineffective portion is recognised immediately in the profitand loss account or the cost of the related non-financial asset (for e.g. inventory or fixed assets), as applicable.
Amounts accumulated in equity are reclassified to the profit and loss account in the periods when the hedgeditem affects profit or loss account i.e. when the transaction occurs. The gain or loss relating to the effectiveportion of interest rate swaps hedging variable rate borrowings is recognised in the profit and loss account orthe cost of the related asset for which the borrowing is being utilised. However, when the forecast transactionthat is hedged results in the recognition of a non-financial asset (for e.g. inventory or fixed assets) the gainsand losses previously deferred in equity are transferred from equity and included in the initial measurement ofthe cost of the asset. The deferred amounts are ultimately recognised in cost of goods sold in case of inventoryor in depreciation in case of fixed assets.
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, anycumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transactionis ultimately recognised in the profit and loss account or the cost of the related non-financial asset (for e.g. inventory orfixed assets) as applicable. When a forecast transaction is no longer expected to occur, the cumulative gain or loss thatwas reported in equity is immediately transferred to the profit and loss account.
The fair values of various derivative instruments used for hedging purposes are disclosed in note 10. Movements on thehedging reserve are shown in statement of changes in equity. The full fair value of a hedging derivative is classified as anon-current asset or liability when the remaining maturity of hedged item is more than 12 months, and as a current assetor liability when the remaining maturity of the hedged item is less than 12 months. Trading derivatives are classified as acurrent asset or liability.
Employees’ Share Option Scheme
The grant date fair value of equity settled share based payments to employees is initially recognised in the balance sheetas deferred employee compensation expense with a consequent credit to equity as deferred employee compensation reserve.
The fair value determined at the grant date of the equity settled share based payments is recognised as an employeecompensation expense on a straight line basis over the vesting period.
When an unvested option lapses by virtue of an employee not conforming to the vesting conditions after recognition of anemployee compensation expense in profit or loss, employee compensation expense in profit or loss will be reversed equalto the amortised portion with a corresponding effect to deferred employee compensation reserve in the balance sheet.
When a vested option lapses on expiry of the exercise period, employee compensation expense already recognised in theprofit or loss is reversed with a corresponding reduction to deferred employee compensation reserve in the balance sheet.
When the options are exercised, deferred employee compensation reserve relating to these options is transferred to sharecapital and share premium account. An amount equivalent to the face value of related shares is transferred to share capital.Any amount over and above the share capital is transferred to share premium account.
4. PROPERTY, PLANT AND EQUIPMENTUnaudited Audited
September 30, December 31,2008 2007
Rupees
Operating fixed assets - note 4.1 and 4.2 2,018,951 2,133,053
Capital work-in-progress
- the project - note 4.3` 10,363,144 2,565,400
- others 24,734 10,308
10,387,878 2,575,708
12,406,829 4,708,761
Nine Months Report – September 2008
24
(Amounts in thousand)
Nine Months Report – September 2008
25
4.1. Capitalisation of operating assets during
the period / year were as follows:
Unaudited AuditedSeptember 30, December 31,
2008 2007Rupees
Leasehold land 3,346 8,550
Furniture, fittings and office equipment 13,728 12,660
Vehicles 11,349 18,770
28,423 39,980
4.2 During the period:– assets costing Rs.1,725, having a net book value of Rs. 1,351, were disposed of for Rs. 1,236; and
– assets costing Rs. 3,298 having a net book value of Rs. 243, were written off, resulting due to an independent physicalverification exercise carried out during the period.
4.3 Cost capitalised todate relating to the Project:
Unaudited AuditedSeptember 30, December 31,
2008 2007Rupees
Plant and machinery 9,171,235 1,923,749
Building on leasehold land 140,084 100,650
Other ancillary costs - note 4.3.1 778,954 341,736
Ethylene pipeline and power cables 56,615 30,250
Water and gas pipelines 216,256 169,015
10,363,144 2,565,400
4.3.1 Other ancillary costs, directly attributable to the Project, capitalised todate, are as follows:
Unaudited AuditedSeptember 30, December 31,
2008 2007Rupees
Salaries, wages and benefits 245,376 92,989
Legal and professional charges 46,371 21,945
Training and travelling expense 70,166 45,590
Borrowing costs, including mark-up on finances
capitalised 301,320 134,431
Bank Charges 31,825 1,766
Depreciation 11,259 5,269
Others 72,637 39,746
778,954 341,736
(Amounts in thousand)
7. LOANS, ADVANCES, DEPOSITS, PREPAYMENTS AND OTHER RECEIVABLES
Included in other receivables is an amount representing custom duty refundable of Rs. 18,043. During the period, theCollector of Customs issued an order dated April 11, 2008, disposing off the refund applications filed by the Company forthe refund of this duty paid at import stage. The Company based on the advice of its tax consultant, has filed an appealbefore the Collector of Customs (Appeals), Karachi dated May 31, 2008 against the aforementioned order. However, theCompany on basis of prudence has made provision against the aforementioned refundable amount in these financialstatements.
Nine Months Report – September 2008
26
9. SHARE CAPITAL
During the period the Company issued 76,767,677 ordinary shares of Rs. 10 each at a subscription price of Rs.18 pershare to various investors. Of this JS Global Capital Limited (JS Global), one of the investors, made available 50 millionordinary shares out of its total shareholding in the Company to the general public through listing at the Karachi StockExchange under an Offer for Sale dated May 31, 2008. The Company was listed on Karachi Stock Exchange in July 2008.
10. HEDGING RESERVE
Hedging reserve mainly represents the effective portion of changes in the fair values of designated cash flow hedges.
During the period, the Company purchased forward exchange contracts having various maturity dates to hedge its Dollarcurrency exposure of US $ 71,152 representing the anticipated cash outflows for the Project.
5. INTANGIBLE ASSETS
Additions made during the period amounted to Rs. 1,055 (December 31, 2007: Rs. 2,785).
Unaudited AuditedSeptember 30, December 31,
2008 2007 Rupees
6. STOCK-IN-TRADE
Raw and packing materials 691,486 256,277
Work-in-progress 18,178 22,861
Finished goods
- own manufactured product 584,473 640,170
- purchased product 155 831
584,628 641,001
1,294,292 920,139
Unaudited AuditedSeptember 30, December 31,
2008 2007 Rupees
8. CASH AND BANK BALANCES
Cash in hand 935 834
Cash at bank on
- current accounts 9,433 97,252
- saving accounts 290,508 149,770
299,941 247,022
300,876 247,856
(Amounts in thousand)
Nine Months Report – September 2008
27
At period end, the Company owned forward exchange contracts to purchase US $ 30,000 at various maturity dates matchingthe anticipated payment dates for commitments with respect to the Project. The fair values of these contracts amountedto Rs. 81,000 as at period end.
11. EMPLOYEES’ SHARE COMPENSATION RESERVE
The employees' share option scheme (the Scheme) was originally approved by the shareholders in their ExtraordinaryGeneral Meeting (EGM) held on October 8, 2007. According to the scheme, senior employees who are critical to thebusiness operations, shall be granted options to purchase five million three hundred thousand newly issued ordinary sharesat an exercise price of Rs. 22 per ordinary share. The number of options granted is calculated in accordance with the abilityand criticality of employee to the business, subject to approval by the Compensation Committee. The options carry neitherright to dividends nor voting rights. Vesting period shall start from the date of grant and shall end on December 31, 2009,where after the options can be exercised within a period of two years. Future employees who join by October 31, 2008and those who are promoted by the same date, may also be granted options, however, the length of vesting period shallbe the same as enjoyed by first recipients of options.
During the period, the Company proposed certain changes relating to "date of grant" in the originally approved scheme.In September 2008, Securities and Exchange Commission of Pakistan approved the amendment as approved by shareholdersin their EGM held on June 27, 2008.
The effect of grant of share options has been incorporated in these condensed interim financial statements. The amountsrecognised in profit and loss account and balance sheet are as follows:
(Rupees)Employees’ share option compensation reserve and deferred employee
compensation expense recognised on grant date 9,625
Less: Amortization for the period October 8, 2007 to September 30, 2008 4,278
Closing balance as on September 30, 2008 5,347
The Company used Black Scholes pricing model to calculate the fair value of share options at the grant date. The fairvalue of the share options as per the model and underlying assumptions are as follows:
Total number of share options issued 5,175Fair value of the share options at grant date Rs. 1.86Share price at grant date Rs. 18Exercise price Rs. 22Annual Volatility 15.13%Risk free rate used 10.12%
12. LONG TERM FINANCES AND MORABAHAS
12.1 The Company entered into a Syndicated Term Finance Agreement on October 12, 2007 for Rs. 5,700,000.The facility is repayable in seventeen semi-annual installments commencing 30 months after May 9, 2008, theeffective date. The facility carries mark-up at the rate of 2.25% over six months Karachi Inter Bank Offered Rate(KIBOR) and monitoring fee of Rs. 700 per annum. Commitment fee at the rate of 0.15% per annum isalso payable on that part of the finance that has not been drawn. During the period, Company has drawn downRs. 3,200,000 against the facility.
Transaction costs amounting to Rs. 108,311 have been netted-off against the drawn amount of finance, as per policy.
12.2 During the period, on February 15, 2008, the Company repaid the bridge finance facility amounting to Rs. 1,240,000.This facility was arranged to meet the intermediate funding requirements of the Project.
12.3 The Company, effective June 21, 2007, entered into a loan agreement with the International Finance Corporation(IFC) consisting of:
i) Loan A, amounting to US $ 30,000; and
ii) Loan B, amounting to US $ 30,000.
The loans, obtained to finance the Project referred to in note 1.3, carry an interest at the rate 2.6% to 3% above 6 monthsLIBOR with a commitment fee at the rate of 0.50% per annum on that part of the loan that has not been disbursed. Theloans are to be repaid in fifteen half yearly installments commencing from June 15, 2010.
(Amounts in thousand)
13. PROVISIONS
The Company has paid Rs. 73,450 on account of Special Excise Duty (SED) on import of plant and machinery for theProject. The Company has adjusted this SED in the monthly sales tax returns against SED on goods produced and soldby the Company. The Company has approached Federal Board of Revenue (FBR) to obtain clarification in respect of theadjustment of SED made by the Company in monthly sales tax return. Pending such clarification, the Company,based on prudence, has made provision of the aforementioned SED in these financial statements.
14. CONTINGENCIES AND COMMITMENTS
14.1 Commitments
– Performance guarantees issued by banks on behalf of the Company as at September 30, 2008 amounted to Rs. 264,281 (December 31, 2007: Rs. 301,431).
– Contracts signed in respect of capital expenditure for the Project, but not executed as at September 30, 2008amounted to Rs. 3,706,784 (December 31, 2007 Rs. 7,897,193).
Nine Months Report – September 2008
28
Nine Months Nine Months Quarter Quarterended ended ended ended
Sep. 30, 2008 Sep. 30, 2007 Sep. 30, 2008 Sep. 30, 2007 Rupees
Opening stock of work-in-progress 22,861 16,051 14,018 13,553
Raw and packing materials consumed 4,655,758 3,171,583 1,844,026 1,180,594Salaries, wages and staff welfare 75,752 78,587 28,301 28,470Fuel, power and gas 113,566 100,072 46,388 33,103Repairs and maintenance 9,663 12,505 4,932 1,630Depreciation 125,879 126,508 41,932 42,303Consumable stores 14,191 22,131 5,351 3,938Purchased services 14,730 16,558 5,022 8,476Storage and handling 100,570 94,344 36,332 34,413Training and travelling expenses 6,469 6,879 3,973 2,750Communication, stationery and other office expenses 1,890 1,183 1,157 299Insurance 7,306 11,637 2,443 3,328Provision against special excise duty 399 Other expenses 1,987 4,180 1,279 290
5,128,160 3,646,167 2,021,136 1,339,594
Closing stock of work-in-progress (18,178) (16,175) (18,178) (16,175)
Cost of goods manufactured 5,132,843 3,646,043 2,016,976 1,336,972
Opening stock of finished goods 640,170 588,065 300,173 310,125Closing stock of finished goods (584,628) (242,387) (584,628) (242,387)
55,542 345,678 (284,455) 67,738
Cost of goods sold - own manufactured product 5,188,385 3,991,721 1,732,521 1,404,710 - purchased product 676 7,671
5,189,061 3,999,392 1,732,521 1,404,710
– – –
– –
(Amounts in thousand)
15. COST OF SALES
Nine Months Report – September 2008
29
17.1 Expenses directly attributable to the Project have been capitalised, as referred to in note 4.3.
Nine Months Nine Months Quarter Quarterended ended ended ended
Sep. 30, 2008 Sep. 30, 2007 Sep. 30, 2008 Sep. 30, 2007 Rupees
16. DISTRIBUTION AND MARKETING EXPENSES
Salaries, wages and staff welfare 31,537 28,796 12,457 10,896Advertising, sales promotion and entertainment 21,652 16,784 5,940 6,332Product transportation and handling 152,665 112,876 54,134 38,889Rent, rates and taxes 3,569 3,454 1,818 851Purchased services 6,649 4,875 2,302 1,393Insurance 646 219 292 89Depreciation 3,090 3,014 1,098 972Training and travelling expenses 6,126 5,574 2,112 1,937Communication, stationery and other office expenses 1,817 2,181 1,196Other expenses 2,020 1,891 327 920
229,771 179,664 80,480 63,475
17. ADMINISTRATIVE EXPENSES
Salaries, wages and staff welfare 68,170 35,060 28,520 11,802Rent, rates and taxes 9,414 6,115 3,929 2,307Purchased services 8,731 5,284 4,474 1,926Insurance 250 214 108 12Depreciation - note 17.1 4,374 2,813 1,350 1,013Amortization Training and travelling expenses 13,506 7,606 5,100 2,117Communication, stationery and other office expenses 7,264 3,476 3,983 1,156Other expenses 9,183 1,940 3,691 175
120,892 62,508 51,155 20,508
– – – –
–
(Amounts in thousand)
Nine Months Report – September 2008
30
Nine Months Nine Monthsended ended
Sep, 30, 2008 Sep, 30, 2007Rupees
18. CASH GENERATED FROM OPERATIONS
Profit before taxation 839,639 456,749
Adjustments for non cash chargesand other items:
Provision for staff retirement and other service benefits 8,336 3,591 Depreciation 132,856 132,176 Employee share compensation expenses 9,625 Amortization 488 49 Income on deposits / TFC / US Dollar Bonds (45,406) (49,033)Finance costs 21,624 31,419 Loss on disposal of operting assets (358) (176)Operating assets written off 243 Working capital changes - note 18.1 439,189 463,439
1,406,237 1,038,214
18.1 Working capital changes
Decrease / (Increase) in current assets
Stores and spares (10,560) (2,816) Stock-in-trade (374,153) 492,111 Trade debts (72,490) (67,570)
Loans, advances, deposits, prepayments and other receivables (net) 89,990 16,316
(367,213) 438,041
Increase in current liabilities
Trade and other payables 806,402 25,398
439,189 463,439
–
–
(Amounts in thousand)
Nine Months Report – September 2008
31
19. TRANSACTIONS WITH RELATED PARTIES
Sales, purchases and other transactions with related parties are carried out on commercial terms and conditions.Following transactions were carried out with related parties during the period:
20. DATE OF AUTHORISATION FOR ISSUE
These condensed interim financial statements were authorised for issue on October 21, 2008 by the Board of Directorsof the Company.
21. CORRESPONDING FIGURES
Corresponding figures in the balance sheet and statement of changes in equity comprise of balances as per the annualaudited financial statements for the year ended December 31, 2007, whereas corresponding figures in the profit and lossaccount and cash flow statement comprise of balances of comparable period as per the condensed interim financialstatements for the nine months ended September 30, 2007.
Nine Months Nine Monthsended ended
Sep. 30, 2008 Sep. 30, 2007
Rupees
Holding Company Purchase of services 9,971 3,688Sale of services 1,831 2,277Sale of steam and electricity 25,397 26,816Use of operating assets 765 1,639Pension fund contribution 2,208 1,620Provident fund contribution 3,322 2,430
Associated Companies Purchase of goods 4,707,808 3,240,723Sale of goods 78,648 111
Related parties by virtue ofcommon directorshipPurchase of goods 1,577 –Purchase of services 110,152 94,816Sale of services 1,256 –Insurance 458 1,443Directors fee 10 –Reimbursements 71 –
Key management personnelManagerial remuneration 85,824 63,605Retirement benefits 5,737 4,201Other benefits 45,598 29,588
Number of employees 45 37
Asif Qadir Masaharu DomichiPresident & Chief Executive Director
(Amounts in thousand)