J K Pharmachem Ltd Directors Report.

J.K. PHARMACHEM LIMITED ANNUAL REPORT 2004-2005 DIRECTORS REPORT To The Members Your Directors present the Annual Report and Audited Accounts of the Company for the year ended 30th September 2005. During the year under review there was a turnover of Rs.6.53 Crores. There was an operating loss of Rs.4.18 Crores and after providing for financial charges and depreciation, there was a deficit of Rs.10.91 Crores. The woes of Indian Penicillin-G industry caused by imports from China continued during the year under review resulting in suspension of operations of several units. As a result of cheap imports from China and the un-remunerative domestic prices, the manufacturing operations of the Company continued to be unviable and remained suspended throughout the year under review. To further cut losses a settlement with the workmen was arrived at in January, 2005 and all the workmen were amicably paid off. The Company has been making efforts to find a viable proposition for revival of our unit as well as for strategic alliance with Indian or foreign companies. On a notice of motion taken out by Bank of India in its capacity as Trustees for Secured Debenture holders, the Bombay High Court has appointed a Receiver over the immovable properties, current assets and book debts on which the Debentures are secured. Conservation of Energy, etc: Pursuant to Section 217(1)(e) of the Companies Act, 1956 read with the Companies (Disclosure of Particulars in the Report of Board of Directors) Rules 1988, particulars of energy conservation, technology absorption, foreign exchange earnings and outgo are annexed. Directors: During the year Dr. S.K. Sagar ceased to be the Whole-time Director of the Company w.e.f. 19th February 2005. Dr. S.K. Sagar, however continues to be a Director on the Board of the Company. Shri D.C. Jain and Shri Pramod Kapoor retire by rotation at the ensuing Annual General Meeting, and being eligible offer themselves for re- appointment. The Company has been advised legally that the provisions of Section 274(1)(g) of the Companies Act, 1956 is not applicable in respect of re-appointment in this Company of the Directors who are retiring by rotation. On 29th April, 2005, Shri V.P. Vig was appointed as an additional Director pursuant to Section 260 of the Companies Act, 1956 and holds office upto the ensuing Annual General Meeting. The Company has received a notice under Section 257 of the Companies Act from a member of the Company signifying his intention to propose the appointment of Shri V.P. Vig as a Director liable to retire by rotation. Further Shri V.P. Vig has been appointed as Manager in terms of Section 269 of the Companies Act, 1956 w.e.f. 27th July 2005 without any remuneration. Auditors: M/s. Lodha & Co., Chartered Accountants, the Auditors of the Company, retire at the conclusion of the ensuing Annual General meeting and being eligible, offer themselves for re-appointment. The observations of the Auditors in their Report read with relevant notes on accounts are self- explanatory. Cost Audit: In view of there being no production during the year, the Company has sought exemption from the applicability of Cost Audit from Department of Company Affairs for the year. Particulars of Employees: None of the employees are in receipt of remuneration in excess of limits prescribed under the provisions of Section 217(2A) of the Companies Act, 1956. Corporate Governance: Pursuant to Clause 49 of the Listing Agreement with the Stock Exchanges, a Management Discussion and Analysis, Corporate Governance Report and Auditors Certificate regarding compliance of conditions of Corporate Governance are annexed hereto which form part of this Annual Report. Directors Responsibility Statement: As required under Section 217(2AA) of the Companies Act 1956, your Directors state that: (i) In the preparation of annual accounts, the applicable accounting standards have been followed along with the proper explanation relating to material departures; (ii) The accounting policies have been selected and applied consistently and judgements and estimates made are reasonable and prudent so as to give a true and fair view of the state of affairs of the Company at the end of the financial year and of the profit and loss of Company for that period; (iii) proper and sufficient care has been taken for maintenance of adequate accounting records in accordance with the provisions of the said Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities; and (iv) The annual accounts have been prepared on a going concern basis. Acknowedgements: Your Directors acknowledge and sincerely appreciate the continued support and co-operation from Financial Institutions, Banks, various Government agencies, Shareholders, Debenture holders, our valued customers and the employees. On behalf of the Board Place: New Delhi V.P. Vig D.C. Jain Date : 30th November 2005 Director &Manager Director ANNEXURE TO THE DIRECTORS REPORT CONSERVATION OF ENERGY, TECHNOLOGY ABSORPTION AND FOREIGN EXCHANGE EARNINGS & OUTGO: THE COMPANIES (DISCLOSURE OF PARTICULARS IN THE REPORT OF BOARD OF DIRECTORS) RULES, 1988. A. CONSERVATION OF ENERGY: Operations of the Company remained suspended during the year under review. PARTICULARS OF CONSERVATION OF ENERGY: (I) POWER & FUEL CONSUMPTION 2004-05 2003-04 1. ELECTRICITY: (a) Purchased: Unit (MWH) - 26.32 Total Amount (Rs. in Lacs) - 257.22 Rate/Unit (Rs.) - 9.77 (Including Max. Demand Charges) (b) Own Generation: Through Generator Unit (MWH) - 345.80 Unit/Ltr. of HSD/Furnace Oil - 3.81 Cost/Unit (Rs.) - 2.78 2. COAL - - 3. FURNACE OIL Quantity (KL) - 15200.41 Total Amount (Rs. in Lacs) - 1539.53 Average Rate (Rs./Ltr.) - 10.12 (II) CONSUMPTION PER UNIT OF PRODUCTION Electricity (KWH/BU) - 31.21 Furnace Oil (Ltr./BU) - 12.75 B. TECHNOLOGY ABSORPTION, RESEARCH AND DEVELOPMENT 1. RESEARCH & DEVELOPMENT: No R&D activities were carried out during the year under review in view of suspension of operations of the factory and no expenses were incurred under this head. 2. TECHNOLOGY ABSORPTION, ADAPTATION AND INNOVATION: Operations remained suspended during the year. C. FOREIGN EXCHANGE EARNINGS AND OUTGO: (Rs. in lacs) 2004-05 2003-04 Foreign Exchange Earning Nil Nil Foreign Exchange Outgo 13.77 111.80 MANAGEMENT DISCUSSION AND ANALYSIS OVERVIEW: During the year under review, no improvement in the domestic Penicillin-G industry, was noticed. Presently only one Penicillin-G unit is manufacturing whereas another is producing small quantity for its captive consumption. Import prices hovered around US$ 6.0-6.25/BU during the year under review & accordingly domestic prices were also in the range of about Rs.320/BU. Raw materials prices continued to rise (by about 25%) & furnace oil from Rs.10841/KL in Sept. 04 to Rs.18000/KL in Sept. 05 due to spurt in global oil prices, hence cost of production increased substantially thereby continuing to render the operations unviable. Due to this, the units producing Penicillin-G continued to incur heavy losses. As per information available and as reported earlier prices of Penicillin-G being imported from China are at dumping level, which are lower than manufacturing cost in China. Indian Penicillin Manufactures Association (IPMA) brought this anomaly to the notice of the Government of India with a request to impose anti-dumping duty on imports of Penicillin-G but to no avail. On the contrary, export obligation period which was reduced from 30 months to 3 months, was subsequently increased to 6 months during the year. This has adversely affected the Indian Penicillin industry. The global market share of India has further come down to 3% against 7%, whereas Chinas market share went up to 75% against 65% last year. Huge build-up of capacities in China has led to over-supply resulting in a price crash. Although the international prices increased somewhat but the cost of production increased much more due to spurt in global prices of petroleum products and raw materials especially solvents and sugar. As per available information, the price level of Penicillin-G imported from China is below the cost of manufacture for most of the producers internationally but China continued dumping Penicillin-G in the Indian market which crippled the Indian Penicillin industry. OUTLOOK: On the international front, the capacity expansions for manufacturing Penicillin-G is increasing and China will continue to dominate the global Penicillin-G scenario. Any further reduction in import duty will adversely impact the domestic industry. Unless suitable measures are taken to neutralize the inequalities through lower power tariff, higher customs duty and also imposition of anti-dumping duty, it will be difficult for the Indian Penicillin industry to recover. HUMAN RESOURCES: The operations of the Company remained suspended from middle of September 04. An amicable settlement was reached with the workmen whereby all the workmen were paid off. Only a nucleus management cadre continues. THREATS AND CONCERNS: Major area of concern is the continuous import of Penicillin-G from China at very low prices, i.e. at below their cost prices. Further, expected reduction in customs duty, rise in the petroleum products globally as well as absence of anti-dumping duty on Penicillin-G by Govt. of India will completely destroy the Indian Penicillin-G industry. FINANCIAL PERFORMANCE AND INTERNAL CONTROL SYSTEMS: During the year under review, the Companys turnover was Rs.6.53 crores and Operating loss Rs.4.18 crores. After providing for financial charges, depreciation, extraordinary income, the loss for the year was Rs.10.91 crores. (Rs. Crs.) PARTICULARS 2004-05 2003-04 Turnover 6.53 44.91 Operating Profit (PBIDT) (4.18) (14.03) Cost of Borrowings 6.53 7.46 Profit/(Loss) before tax (10.90) (31.45) Fringe Benefit Tax 0.01 - Extraordinary Items - 3.15 Profit/(Loss) After Tax (10.91) (28.30) During the year, the Company has paid all dues towards principal redemption and interest upto 30.04.2005 of debentures held by public. The Company could not meet the commitments of other two institutional debenture holders and the interest due to the public accrued upto 30.09.2005. Internal control systems are in place in all activities of the operations of the Company. The Company has been conducting structured and elaborate internal audits since its inception. The Audit Committee of Directors meets regularly and reviews operations of internal audit and action thereon. CAUTIONARY STATEMENT: Management Discussion and Analysis Report contains forward looking statements, which may be identified by the use of words in that direction, or connoting the same. All statements that address expectations or projections about the future, including but not limited to statements about the Companys strategy for growth, product development, market position and expenditures and financial results are forward looking statements. The Companys actual results, performance or achievement could thus differ materially from those projected in any such forward-looking statements. The Company assumes no responsibility to publicly amend, modify or revise any forward looking statements, on the basis of any subsequent development, information or events.