Faran Sugar Mills Limited- Annual Reports 2004

FARAN SUGAR MILLS LIMITED

ANNUAL REPORT 2004

AUDITORS' REPORT TO THE MEMBERS

We have audited the annexed balance sheet of Faran Sugar Mills Limited as at September 30,2004 and the related

profit & loss account, cash flow statement and statement of 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 company's 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 and 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

the management, as well as, evaluating the overall presentation of the above said statements. We believe that our audit

provides a reasonable basis for our opinion and after due verification, we report that:

1. The company continues to charge depreciation on number of production days instead of on full year's basis as

recommended vide Accounting Technical Release-11 of the I nstitute of Chartered accountants. The effect of such

a decision could not be ascertained unless a revised rate of charge based on remaining useful life of the assets is

determined by the company.

2. The company has not reversed excess provisions of Rs.32.875 million on account of deferred tax liability as per

requirements of IAS 12 (IncomeTaxes) as at September 30,2004.

(a) in our opinion, proper books of accounts have been kept by the company as required by the Companies

ordinance, 1984;

(b) in our opinion:

(i) the balance sheet together with 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;

(ii) the expenditure incurred during the year was for the purpose of the company's business ; and

(iii) the business conducted, investments made and the expenditure incurred during the year were in

accordance with the objects of company;

(c) expect for the effect of the matter stated above under paragraph 1 & 2 of this audit report and notes 9.3 and

24 to the financial statements, in our opinion and to the bet 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

September 30,2004 and of the profit, its cash flows and changes in equity for the year then ended; and

(d) in our opinion, no Zakat was deductible at source under the Zakat and Ushr Ordinance, 1980.

The summary of key operating and financial data for last six years annexed.

The company operates a contributory recognized Provident Fund Scheme.The Accounts/Funds are annually

audited by a firm of chartered accountants. The value of investment at cost held by the Trust was Rs.2.130

million with net realiseable value of Rs.6.635 million as of 30' "September, 2004,

Board Meetings

During the year five meetings of Board of Directors were held. Participation of Directors is as follows:

Name of Director

No.of meetings attended

Mr. Mohammad Amin Ahmed Bawany

5

Mr. Mohammad Omar Bawany

5

Mr. Ahmed Ali Mohammad Amin

4

Mr. Iqbal A. Rehman

5

Mr.A.WahidA.Gaffar

5

Mr. A. Wahid Jaliawala

5

Mr. Muhammad Asif- N.I.T

4

Mr. Iqbal Ismail -N.I.T.

3

Leave of absence was granted to Directors who could not attend some meetings.

Pattern of Share Holding

The pattern of share holding as on 30'"September, 2004 is annexed.

Current Season

The season commenced on 30'"October 2004, However due to short supply of cane, there was interruption of 14

days from 1st December to 14'"December 2004. By 29'"December 2004 mill crushed 188,188 M.Tons of Cane and

produce 15,795 M.Tons of Sugar at an average recovery of 8.80.

Future Outlook

The overall cane crop in the province is estimated to be 25% lower compared to last year. Consequently the

production would be lower to that extent. The Government increased the cane price by Rs.2/- to Rs.43/- per 40 Kgs

while the shortage of cane and resultant competition might force up the price to an uneconomical level.

The sugar industry is one of the major industries of the country providing employment to mostly rural population and

played major role in the development of rural areas in the vacinity of the mills yet it has been ignored. Without realistic

long-term sugar policy, the situation is not likely to stablize - temporary measures not withstanding.

NOTES:

1. The Share Transer Books of the Company will remain closed from 20th January 2005 to 26th January, 2005.

(both days inclusive)(for Entitlement of 50% Right share.)

2. A member entitled to attend and vote at the Annual General Meeting may appoint another member as his/her

proxy t o attend and vote in his/her behalf, Proxies in order to be effective must be received by the Company at its

Registered Office not later than 48 hours before the time of the Meeting.

3. The shareholders whose shares are registered in their account / sub-account with Central Depository System

(CDS) are requested to bring NIC along with their account numbers in CDS and participant's ID number for

verification. In case of appointment of proxy by such account holders and sub-account holders the guidelines are

contained in SECP's circular 1 of 26th January 2000 must be followed.

4. The shareholders are requested to notify the Company immediately the change in their address, if any.

5. The share holders are also requested to intimate us their NIC # to implement the requirements of annual returns

(Form A) which the Company is required to file with the SECP under section 156 of the Ordinance.

STATEMENT AS REQUIRED U/S160 (1 )(b) OFTHE COMPANIES ORDINANCE, 1984

This statement sets out the material facts concerning the Special Business, given in agenda item No. 5

(placement of the Quarterly financial statements in Website) to be transacted at the 23rd Annual General Meeting

of the Company to be held on January 26th, 2005

The Securities & Exchange Commission of Pakistan (SECP)vide Circular No. 19 of 2004 has allowed the listed

Companies to place the quarterly financial statements on their website instead of sending the same to each

shareholders by post. We appreciate this decision, which would ensure prompt disclosure of information to the

shareholders, besides saving of costs associated with printing and dispatch of the financial statements by post.

The Company is maintaining its website www.faran.com.pk the prior permission of the SECP would be sought

for transmitting the quarterly financial statements through company's website after the approval of the

shareholders. The Company, however, will supply the copies of financial statements to the shareholder on

demand at their registered address, free of cost, within one week of receiving such request.

The directors of the Company have no interest in the above resolution that would need a further disclosure.

STATEMENT OF COMPLIANCE WITH THE CODE OF

CORPORATE GOVERNANCE

This statement is issued to comply with the Code of Corporate Governance embodied in the listing

regulations of Stock Exchanges for the purpose of establishing a frame work 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 following manner.

1 The company encourages representation of independent non-executive directors on its Board. The

Board has five non-executive Directors out of a total of eight.

2 The Directors have confirmed the none of them is serving as a director in more than ten listed

companies, including this company.

3 All the elected directors of the company are registered as taxpayers and none of them has defaulted

in payment of any loan to a banking company, a DPI or NBFi or, being a member of a stock

exchange, has been declared as a defaulter by that stock exchange.

4 The company has prepared a Statement of Ethics and Business Practices, which has been signed

by all the directors and employees of the Company.

5 The board has developed a vision/mission statement, overall corporate strategy and significant

policies of the company. A complete record of particulars of significant policies along with the dates

on which they were approved or amended has been maintained.

6 All the powers of the Board have been duly exercised and decisions on material transactions,

including appointment and determination of remuneration and terms and condition of employment

of the CEO and other directors, have been taken by the Board.

7 The meetings of the Board were presided over by the Chief Executive.

8 The Board will arrange orientation courses for its directors to apprise them of the duties and

responsibilities.

9 There was no new appointment of CFO / Secretary or Head of internal audit.

10 The directors report for this year has been prepared in compliance with the requirement of the code

and fully describes the salient matters required to be disclosed.

11 The financial statements of the company were duly endorsed by CEO and CFO before approval of

the Board.

12 The directors, CEO and executives do not hold any interest in the shares of the company other than

that disclosed in the pattern of share holding.

13 The Company has complied with all the corporate and financial reporting requirements of the code.

DIRECTORS' REPORT

It gives me immense pleasure to present you 23rd Annual Report for the financial year ended 30th September 2004.

All thanks to ALLMIGHTY ALLAH who guided and helped us to come out successfully from crises and report net

profit aftertax of Rs.61.584 million for the year against loss of Rs.20.426 million in last year.

The sugar industry in Sindh witnessed another year of crises when prices of sugar in the market remained

depressed with large quantity of unsold stock. Some late support was lent by Trading Corporation of Pakistan.The

major relief, However, came from reduction of Rs.2/- in cane procurement price fixed by the government for the

season 2003-04. This had beneficial balancing effect on cost and sale price. In this scenario, your management's

continues to save whatever it could by implementing cost saving measures with emphasis on efficiency.

With a view to supplement income of the company and utilization of by product molasses, an Investment of Rs.48.00

million was made in Unicol Limited with 33% equity holding of Rs.58.670 million. The project was scheduled to

commence production from January, 2005, However, the progress was slowed down due to abnormal increase in

price of Steel, Cement and related construction material, while the raw material molasses - cost also went upto a

level where conversion into ethanol was uneconomical. The schedule has been revised so as to start production

from the crushing season 2005-06.

Financial Reporting Frame Work

In compliance with the requirement of Code of Corporate Governance, your Director report that:

The financial statement prepared by the Management present fairly its state of affaires, the results of its operation,

cash flow and changes in equity.

The company has maintained proper books of accounts as required by the law.

Appropriate accounting policies have been consistently applied in preparation of financial statements and

accounting estimates are based on reasonable and prodent judgment.

The accounting policies and disclosures are in accordance with the International

Accounting Standards applicable in Pakistan, unless otherwise disclosed.

The system of internal control is sound in design and effectively implemented.

There is no significant doubt as to the ability of the Company to continue as an on-going concern.

There has been no material departure from the best practices of corporate governance, as detailed in the

listing regulations.

AUDITORS REVIEW REPORTTOTHE MEMBERS ON STATEMENT OF

COMPLIANCE WITH BEST PRACTICES OF CODE OF CORPORATE GOVERNANCE

We have reviewed the Statement of Compliance with best practices contained in the Code of Corporate

Governance as applicable to the Company for the year ended September 30,2004 prepared by the

Board of Directors of Faran Sugar Mills Limited, to Comply with the listing Regulation No. 37 of the

Karachi Stock Exchange (Guarantee) Limited and XIII of the Lahore Stock Exchange (Guarantee)

Limited, where the Company is listed.

The responsibility for compliance with the Code of Corporate Governance is that of the Board of

Directors of the Company. 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 Company's

compliance with the provisions of the Code of Corporate Governance and report if it does not. A review

is limited primarily to inquiries of the Company personal and review of various documents prepared by

the Company to comply with the Code.

As part of the audit of financial statements we are required to obtain an understanding of the

accounting and internal control system sufficient to plan the audit and develop an effective audit

approach. We have not carried out any special review of the internal control system to enable us to

express an opinion as to whether the Board's statement on internal control covers all controls and the

effectiveness of such internal controls.

Based on our review, nothing has come to our attention which causes us to believe that the statement

of Compliance does not appropriately reflect the Company's 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 September 30, 2004.

The company continues to charge depreciation on the actual number of days of operation of Plant and Machinery.

This gives not only consistency and comparability but also, in the opinion of the Management, is more appropriate

and realistic as it distributes wear and tear cost of plant and machinery on actual crushing and resultant sugar

production.The method is constantly applied for last 12 years and is considered to be more realistic, appropriate and

equitable method of allocation of depreciation cost to the production.

DeferredTaxation

The management as matter of prudence decided to differ the reversal of excess provision in deferred taxation as the

sugar industry in sindh continues to sufferf rom crises, uncertainties, indecision and unpredictable future.

Auditors

Khalid Majid Rahman Sarfaraz Rahim Iqbal Rafiq, Chartered Accountants, Auditors of the company have conveyed

their willingness to be re-appointed as auditors for the next year.

Our special thanks to our team of dedicated Managers and other Executives, Supervisors and Workers, who

continue to put in their best efforts for achieving better results.

Let us pray to Almighty ALLAH for guidance and help to prevail over the current situation.

Note

2004

2003

Balance Sheet as at

Rupees

SHARE CAPITAL AND RESERVE

Authorised Capital

200,000,000

20,000,000 ordinary shares of Rs. 1 0/- each

3

125,513,300

Issued, subscribed, and paid up capital

74,483,842

Revenue reserve

-98,133,504

-159,717,178

Accumulated loss

101,863,638

40,279,964

SUBORDINATED LOAN

5

78,000,000

102,000,000

LONGTERMLOAN

6

298,108,308

261,545,637

DEFERRED LIABILITIES

CURRENT LIABILITIES

7

9,525,670

28,648,239

Short term finances

8

24,000,000

18,000,000

Current maturity of long term liabilities

9

217,216,986

249,625,642

Creditors, accrued and other liabilities

15,210,140

9,880,022

Taxation

265,952,796

306,153,903

802,594,742

709,979,504

14 The Board has formed an audit committee. It comprises 3 members, of whom one is non-executive

director.

15 The meetings of the audit committee were held at least once every quarter prior to approval of

interim and final results of the company as required by the Code. The terms of references of the

committee have been formed, and advised to the committee for compliance.

16 The Board has set-up effective internal audit function.

17 The statutory auditors of the Company have confirmed that they have been given a satisfactory

rating under the quality control review programs of the institute of Chartered Accountants of

Pakistan, that they or any of the partners of the firm, their spouses and minor children do not hold

Shares 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 Institute of Chartered Accountants

of Pakistan.

18 The statutory auditors or the persons associated with them have not been appointed to provide

other services except in accordance with the listing regulation and the auditors have confirmed that

they have observed IFAC guidance in this regard.

19 We confirm that all other material principles contained in the code have been complied with.

Profit and Loss Account

For the year ended September 30,2004.

Note

2004

2003

Rupees

Sales

16

989,234,471

1,396,972,423

Cost of goods sold

17

-919,059,959

(1 ,383,266,094)

Gross profit/(Loss)

70,174,512

13,706,329

Operating Expenses

Administration and general

18

19,901,531

20,813,257

Selling and distribution

19

1,484,617

2,910,225

Machinery lease rent

-

430,452

-21,386,148

-24,153,934

Operating profit/( Loss)

48,788,364

-10,447,605

Other charges

20

1 ,266,573

214,900

Other income

21

-5,448,171

(4,701 ,943)

Financial charges

22

1 1 ,250,786

34,734,146

Reversal of provision for diminution in value of investments

-128,520

-2,249,100

Reversal of Excess provisions

23

-3,443,478

-13,502,022

Reversal of Provision

24

-18,938,197

18,938,197

Provision for doubtful Agricultural Loan

-

12,500,000

Workers Profit Participation Fund

2,085,959

-

13,355,048

-45,934,178

Profit/(Loss) before taxation

62,143,412

(56,381 ,783)

Taxation

25

-559,738

35,955,987

Profit/ (Loss) after taxation

61 ,583,674

-20,425,796

Accumulated loss brought forward

-159,717,178

-139,291,382

-98,133,504

-159,717,178

September 30,2004.

Note

2004

2003

Rupees

FIXED ASSETS

Operating assets

10

473,944,681

487,651,021

Capital work in progress

989,635

572,114

474,934,316

488,223,135

INVESTMENT

11

52,030,020

3,534,300

LONGTERM DEPOSITS

634,379

705,579

CURRENT ASSETS

Stores and spares

41,353,890

40,910,437

Stock-in-trade

12

116,467,811

24,335,201

Trade debtors

493,620

57,051,266

Loans and advances

13

41,938,181

29,835,939

Other receivables

14

70,568,888

58,759,853

Cash and bank balances

15

4,173,637

6,623,794

274,996,027

217,516,490

802,594,742

709,979,504

Cash Flow from Investing Activities

2004

2003

Rupees

Fixed Capital Expenditure

-10,624,461

-2,942,152

Proceeds from Disposal of Fixed Assets

1,525,380

1 ,269,385

Investment in Shares

-48,367,200

-

Long Term Security Deposits

71,200

-178,700

Net Cash from (used in) Investing Activities

-57,395,081

-1,851,467

Cash Flow from Financing Activities

Repayment of Redeemable Capital

-

-25,612,251

Repayment of Road Cess

-4,547,103

-

Long Term Loan received

58,670,000

120,000,000

Repayment of Long Term Loans

-18,000,000

-71,072,617

36,122,897

23,315,132

Increase /(Decrease) in Cash

-2,450,157

3,264,033

Cash and Bank Balances at the beginning of the year

6,623,794

3,359,761

Cash and Bank Balances at the end of the year

4,173,637

6,623,794

Statement of Changes in Equity

For the year ended September 30,2004.

Share

Accumulated

Revenue

Capital

Prof it/ (Loss)

Reserve

Total

(Rupees)

Balance as at October 01 , 2002

125,513,300

-139,291,382

74,483,842

60,705,760

Loss for the year

-20,425,796

-

-20,425,796

Balance as at September 30, 2003

125,513,300

-159,717,178

74,483,842

40,279,964

Profit for the year

-

61 ,583,674

-

61 ,583,674

Balance as at September 30, 2004

125,513,300

-98,133,504

74,483,842

101,863,638

2.6 Operating Fixed Assets

Operating fixed assets are stated at cost less accumulated depreciation and impairment losses, if any except

free hold land and capital work in progress which are stated at cost. Depreciation on operating fixed assets is

charged on yearly basis to income by applying reducing balance method at the rate specified in fixed assets

note.

Maintenance and normal repairs are charged to income as and when incurred. Major renewals and

improvements are capitalized.

Gain and losses on disposal of assets are included in current profit and loss account.

2.7 Accounting for operating lease

The Company charges the appropriate amount of rentals on operating lease to current year's profit and loss

account.

2.8 Investments

The company measures investments at fair values and classifies in to the following categories.

Available for Sales

Investments otherthan held fortrading and held to maturity are classified as available for sale. Any gain or loss

arising on remeasurement to fair value is included in net profit & loss for the period.

Investment in Associates

The company considers its associated company to be such enterprise in which the company has significant

influence, but not control, over the financial and other policies and which neither is a subsidiary nor a joint

venture of the company. The company accounts for investment in associated company using the cost

method net of provision to the extent that a permanent diminution in value is deemed to have been occurred.

2.9 Store & Spares

The basis of valuation has been specified against each:

Store, spares and loose tools : at moving average cost

Stores in transit : at the actual cost incurred up to the date of balance sheet

2.10 Stock-in-trade

Sugar-

- Finished : at lower of average manufacturing cost and net realizable value

- In-process : at average raw material cost

Molasses - : These are valued at net realizable value

2.11 Financial Assets

Financial Assets are Loans, Advances, Deposits, Trade debts, other receivables, Cash & banks. These are

initially recognized at its cost which represent fair value of consideration given for it and subsequent to initial

recognition financial assets are carried at cost, if fair value is not materially different at the balance sheet date.

2/12 Financial Liabilities

Financial liabilities are classified according to the substance of the contractual agreements entered into.

Significant financial liabilities are long-term loans, creditors, accrued and other liabilities.

All financial liabilities are initially recognized at cost, which represents fair value of the consideration received

at initial recognition financial liabilities held for trading are carried at fair value and all other financial liabilities

are measure at amortized cost.