C O N T E N T S. Corporate Information 2. Vision and Mission Statement 3. Notice of Annual Review Meeting 4. Directors Report 5

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2 C O N T E N T S Corporate Information 2 Vision and Mission Statement 3 Notice of Annual Review Meeting 4 Directors Report 5 Statement of Compliance with Best Practices of Corporate Governance 9 Report on Implementation of Transfer Pricing Policy 11 Certificate on Transfer Pricing Policy 13 Auditors Review Report on Statement of Compliance with Best Practices of Corporate Governance 14 Auditors Report 15 Balance Sheet 16 Profit and Loss Account 17 Statement of Changes in Equity 18 Cash Flow Statement 19 Notes to the Accounts 20 Pattern of Certificate Holding

3 Annual Report 2006 CORPORATE INFORMATION Board of Directors Mr. S. Ali Raza Chairman Mr. Shahid Anwar Khan Director Dr. Asif A. Brohi Director Mr. Tajammal H. Bokharee Director Mr. Muhammad Nusrat Vohra Director Mr. Wajahat Baqai Director Mr. Qamar Hussain Director Mr. Shafiq Khan Chief Executive Chief Financial Officer Company Secretary Ms. Bushra Azhar Mr. Adeel S. Ali Audit Committee Mr. Shahid Anwar Khan Chairman Dr. Asif A. Brohi Member Mr. Tajammal H. Bokharee Member Auditors Bankers Legal Advisor Shares Registrar Registered Office M. Yousuf Adil Saleem & Co. (An independent firm associated with Deloitte Touche Tohmatsu) National Bank of Pakistan Al Baraka Islamic Bank Standard Chartered Bank Bank Alfalah Limited Habib Bank Limited Allied Bank Limited MCB Bank Limited Cornelius Lane & Mufti Advocates and Solicitors Nawa-i-Waqt House 4 Shahrah-e-Fatima Jinnah, Lahore Tel.: , Fax: Hameed Majeed Associates (Pvt.) Limited H. M. House, 7 Bank Square, Lahore Tel: , Fax: th 5 Floor, NBP RHQs Building, 26 McLagon Road, Lahore Tel: , Fax: URL: info@nbmodaraba.com 2

4 First National Bank Modaraba VISION PRESERVE TO REPLACE RIBA DRIVEN INSTRUMENTS WITH ISLAMIC MODES OF FINANCING IN A MANNER TO ACHIEVE OPTIMUM CUSTOMER SATISFACTION BY DEVELOPING SUSTAINABLE AND DEPENDABLE RELATIONSHIPS TO BE AN INSTITUTION OF EXCELLENCE, WHICH WILL CREATE AND MAINTAIN AN ENVIRONMENT OF STATE-OF-ART MANAGEMENT SYSTEM AND A HIGH STANDARD OF INTEGRITY, EFFICIENCY PROFESSIONALISM AND INNOVATION ATTAIN THE STATUS OF MOST PROFESSIONALLY AND PROFITABLY RUN MODARABA AMONG ITS COMPETITORS IT SHALL PLACE A SPECIAL EMPHASIS ON HUMAN RESOURCES DEVELOPMENT, DIGNITY, SECURITY, WELFARE OF PEOPLE WHO OPERATE AND WORK FOR THE MODARABA THE FUNDAMENTAL MISSION IS TO SEEK THE PLEASURE OF ALLAH THROUGH MISSION MAKING HUMBLE CONTRIBUTION IN THE TRANSFORMATION OF OUR MERCANTILE AND FINANCIAL SYSTEM AND BUSINESS DEALINGS IN ACCORDANCE WITH THE PRINCIPLES ENSHRINED IN THE SHARIA COMMITMENTS TO PROVIDE RIBA FREE INVESTMENT AND FINANCING OPPORTUNITIES TO THE INVESTORS, THE BUSINESS COMMUNITY AND INDUSTRY IN ALL BUSINESS DEALINGS OF MODARABA, THE RIGHTS OF ALLAH, THE RIGHTS OF ALL CERTIFICATE HOLDERS AND ALL OTHER RIGHTS SHALL BE SINCERELY SAFEGUARDED 3

5 Annual Report 2006 NOTICE OF 3 RD ANNUAL REVIEW MEETING rd Notice is hereby given that the 3 Annual Review Meeting of certificate holders of First National th Bank Modaraba will be held on Tuesday, October 31, 2006 at 11:00 a.m. at 4 Floor, NBP RHQs Building, 26 McLagon Road, Lahore to review the performance of the Modaraba for the year ended June 30, 2006 The Certificate Transfer Book will remain closed from October 24, 2006 to October 31, 2006 (both days inclusive) for the purpose of entitlement of dividend. All transfers received in order, up to close of business on October 23, 2006 at our Registrar's Office, Hameed Majeed Associates (Pvt.) Limited, H.M House, 7 Bank Square, Lahore will be considered in time. The certificate holders whose names appear on the Register of Certificate Holders of First National Bank Modaraba as on October 23, 2006 will be eligible to attend the Annual Review Meeting. By order of the Board Adeel S. Ali Company Secretary National Bank Modaraba Management Company Limited Managers of First National Bank Modaraba Lahore: October 4, 2006 Note: 1. In case of individuals, the account holder and/ or person whose securities are in group account and their registration details are uploaded as per the Regulations, shall authenticate their identity by showing original National Identity Card (NIC) or original passport at the time of attending the meeting (CDC account holders are a l s o requested to bring their participant ID number and account number in CDS). 2. In case of corporate entity, board of directors' resolution/ power of attorney with specimen signature of the nominee shall be produced (unless it has been provided earlier) at the time of meeting. 4

6 First National Bank Modaraba DIRECTORS REPORT Board of Directors of National Bank Modaraba Management Company Limited (NBMMCL), the management Company of First National Bank Modaraba (FNBM), is pleased to present the directors report on the 4th annual accounts of FNBM for the period ended June 30, These accounts have been audited by the statutory auditors of the Modaraba and are accompanied by their audit report. Financial Results: Year Ended June 30, 2006 Year Ended June 30, 2005 Amounts in Rupees 7 Months Ended June 30, 2004 Balance Sheet Size 2,046,360,472 1,206,081, ,605,324 Total Operating & Other Income 160,735,588 53,338,797 10,982,361 Operating & Financial Expenses. 126,915,299 34,689,455 5,791,933 Profit for the period 33,820,289 18,649,342 5,190,428 Modaraba Company s. Management Fee 3,382,029 1,864, ,043 Profit before Tax 30,438,260 16,784,408 4,671,385 Taxation - 181, ,510 Net profit after tax 30,438,260 16,602,966 4,209,875 Transfer to Statutory Reserve 6,087,652 3,320, ,975 Earning per certificate Breakup value per certificate Sector Outlook: Financial sector in Pakistan experienced significant growth in the period under review. The major focus of banks and financial institutions remained on increasing the volume of the business and improving the returns. Due to tight monetary controls exercised by State Bank of Pakistan, a steep rise was witnessed in the mark up rates. On the other hand there was reciprocal increase in the cost of borrowing and deposits. Modaraba sector, being a small segment of the financial sector, got affected from the said developments. Modaraba sector has great reliance on banks and financial institutions to meet its appetite for the funds. As a result of rising trend in the KIBOR and cost of funds of the banks, the financial cost of the Modaraba sector also increased. The other major challenge, currently faced by the Modaraba sector in Pakistan, is the entry of every commercial bank in the Islamic banking segment, which used to be the specialty of Modaraba sector. The direct competition with commercial banks is hindering the growth and profitability of the Modaraba sector. This scenario has fixed the Modaraba sector in a difficult situation. Nevertheless, the Modaraba sector is striving to get its due share in the financial sector by bringing shifts to its strategies from time to time to cope with these adverse circumstances. 5

7 Annual Report 2006 Review of Operations: During the period under review, FNBM continued its journey on the path of steady growth. The major product of the Modaraba is lease finance/ Ijarah. A tremendous growth has been recorded in Net Investment in Lease finance/ Ijarah which increased by 51% from Rs. 792 million as on June 30, 2005 to Rs billion at the end of current year. This increase has a corresponding impact on related items of the Income Statement, like total income and net profit. The total income of the Modaraba increased 200% from Rs. 53 million in the last year to Rs. 161 million in the current year. Similarly net profit increased by 81% from Rs million to Rs million. To diversify its product mix, FNBM has also increased its Morabaha investments significantly, which increased from Rs. 267 million to Rs. 588 million. The Modaraba posted a net profit after taxation amounting to Rs million, which is 81% higher than the profit of Rs million earned during the last year. This profit would have been even higher if FNBM did not have to face and take some hit due to sudden steep decline in stock market during the year. Nevertheless, this profit is satisfactory, because it was earned despite the environment of cut throat competitive, squeezing spreads and decline in stock market. The Modaraba has also been successful in managing to mobilize funds from various financial institutions at competitive rates as disclosed in the financial statements. This was not an easy task as the same was achieved amid tight liquidity position of the market and rising trend of profit rates. We believe in steady and sustainable growth backed by the policy of low risk. This policy has resulted into modest but sustainable profitability coupled with sound and healthy leasing/ investment portfolio comprising of clients of good credit rating and lower level of risk. The lease/ investment portfolio is fairly diversified both in terms of sector, asset type and geographical dispersion. FNBM has managed to enter new sectors during the year and currently the Modaraba has exposure in industries like textile, cement, energy, sugar, transport, auto parts, media and advertising etc. Profit Distribution: The Board in its meeting held on October 04, 2006 has decided to distribute its profits, amounting to One rupee (10%) per certificate subject to Zakat and tax deduction at source as applicable. Entity Rating: JCR-VIS awarded long term entity rating of A- (A minus) and short term entity rating of A-2 to the Modaraba in April, 2006 with a Positive outlook. Keeping in view the phenomenal growth of the Modaraba along with healthy recovery and future prospects, it is expected that the rating may improve in the next assessment. Future Outlook: The major sectors of the economy, like textile, cement and sugar have recently completed their ever highest expansions. FNBM was successful in getting its due share by booking some good leases in the said sectors. However, their appetite for long term financing may not be that high in the coming year. Nevertheless, we believe that the activity of their routine BMR will continue. We are looking forward to tap that BMR as our target market. Besides, efforts will be made to add some new clientele in the portfolio to sustain the existing level of growth. 6

8 First National Bank Modaraba Corporate and Financial Reporting Framework: The financial statements, prepared by the management of the Modaraba, present fairly its state of affairs, the result of its operations, cash flows and changes in equity. Proper books of accounts of the Modaraba have been maintained. Accounting policies have been consistently applied in preparation of financial statements and accounting estimates are based on reasonable and prudent judgment. International accounting standards, as applicable to Modarabas in Pakistan, have been followed in preparation of financial statements. The system of internal control, which is sound in design is in place and is being continuously reviewed by internal audit. The process of review will continue and any weakness in controls will be removed. Board is satisfied with the Modaraba's ability to continue as going concern. There has been no material departure from the best practices of corporate governance, as detailed in the listing regulations. There are no statutory payments on account of taxes, duties, levies and charges, which are outstanding as on June 30, 2006 except those disclosed in the financial statements. During the year four (04) meetings of the Board of Directors were held. Attendance by each directors is as follows: Names of Directors: No of Attendance Mr. S. Ali Raza 4 Mr. Shahid Anwar Khan 3 Dr. Asif A. Brohi 2 Mr. Wajahat Baqai 2 Mr. Qamar Hussain 4 Mr. Tajammal H. Bokharee 4 Mr. Muhammad Nusrat Vohra 4 Mr. Shafiq Khan 4 Leave of absence was granted to directors who could not attend some of the Board meetings. The pattern of certificate holders is annexed. Auditors: The present auditors Messrs M. Yousuf Adil Saleem & Co., Chartered Accountants, being due for retirement, have offered themselves for re- appointment for the year ending June 30, Subject to approval by the Registrar of Modaraba Companies and Modarabas, their appointment has been confirmed by the Board. 7

9 Annual Report 2006 Acknowledgement: The Board would like to take this opportunity of expressing gratitude and thanks to our valued customers for their patronage and support, the Securities and Exchange Commission of Pakistan, Karachi Stock Exchange, Lahore Stock Exchange and Modaraba Association of Pakistan for their continuous support and guidance. Special thanks to our certificate holders for the trust and confidence reposed in us and the Modaraba's staff for their commitment and dedicated services. For and on Behalf of the Board Shafiq Khan Chief Executive Officer Dated: October 4,

10 First National Bank Modaraba STATEMENT OF COMPLIANCE WITH BEST PRACTICES OF THE CODE OF CORPORATE GOVERENANCE FOR THE YEAR ENDED JUNE 30, 2006 This statement is being presented to comply with the Code of Corporate Governance contained in the Regulations No. 37 & 43 of Karachi and Lahore Stock Exchanges respectively for the purpose of establishing framework of good governance, whereby a listed company is managed in compliance with the best practices of corporate governance. The Modaraba has applied the principles contained in the Code in the following manner: 1. The Board presently comprises of eight directors including Chief Executive Officer and all are non-executive directors and are nominees of National Bank of Pakistan (Holding Company of National Bank Modaraba Management Company Ltd). 2. The directors have confirmed that none of them is serving as a director in more than ten listed companies, including this company. 3. All the resident directors of the company are registered as tax payers and none of them has defaulted in payment of any loan to a banking company, a DFI or an NBFC or being a member of a stock exchange, has been declared as a defaulter by that stock exchange. 4. All casual vacancies are filled up by the holding company by nominating of employees of National Bank of Pakistan on the Board of the Company after getting the approval of Registrar of Modaraba Companies and Modarabas. 5. The Modaraba has prepared a Statement of Ethics and Business Practices, which has been signed by all directors and employees of the Modaraba. 6. The Board has developed a vision/ mission statement, overall corporate strategy and significant policies of the Modaraba along with the dates on which they were approved or amended has been maintained. 7. All the powers of the Board have been duly exercised and decisions on material transactions have been taken on the Board. The terms of appointment and remuneration package of the CEO and directors are not approved by the Board as they are nominees of National Bank of Pakistan. 8. The meetings of the Board were presided over by the Chairman and the Board met at least once in every quarter. Written notices of the Board meetings, along with agenda and working paper were circulated at least seven days before the meetings. The minutes of the meetings were appropriately recorded and circulated. 9. The directors are fully aware of the relevant laws applicable to the Modaraba, its policies and procedures and provisions of the Memorandum and Articles of Association to manage the affairs of the Modaraba on behalf of the certificate holders. Further all the directors are employees of NBP and holding key positions in the Bank, as such all directors have relevant experience and knowledge to manage the affairs of the Modaraba. 9

11 Annual Report The Board has approved the appointment of Chief Financial Officer, Company Secretary and Head of Internal Audit. The remuneration and terms and conditions of employment of Chief Financial Officer, Internal auditor and Company Secretary have been approved by the Board, as determined by the Chief Executive Officer. 11. The directors' report for this year has been prepared in compliance with the requirements of the Code and fully describes the salient matters required to be disclosed. 12. The financial statements of the Modaraba were duly endorsed by CEO and CFO before approval of the Board. 13. The Directors, CEO and Executives do not hold any interest in the shares of the Modaraba other than that disclosed in the pattern of holding of certificates. 14. The Modaraba has complied with all the corporate and financial reporting requirements of the Code. 15. The Board has formed an audit committee, which comprises of three members and all are non executive directors including the Chairman of the Committee. 16. The meetings of the audit committee are held at least once every quarter prior to approval of interim and final results of the Modaraba as required by the Code. The terms of reference of the committee have been formed and advised to the committee for compliance. 17. The Board has set-up an effective internal audit function. 18. The statutory auditors of the Modaraba had confirmed that they have been given a satisfactory rating under the quality control review program 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 of the Modaraba and that the firm and all of 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. 19. The statutory auditors or the person associated with them have not been appointed to provide other services except in accordance with the listing regulations and the auditors have confirmed that they have observed IFAC guidelines in this regard. 20. We confirm that all other material principles contained in the Code have been substantially complied with. Shafiq Khan Chief Executive Officer 10

12 First National Bank Modaraba REPORT ON IMPLEMENTATION OF TRANSFER PRICING POLICY FOR THE YEAR ENDED JUNE 30, 2006 We take pleasure in presenting to our certificate holders the Report on Implementation of Transfer Pricing Policy of the Modaraba. During the year the Modaraba entered into following transactions with the related parties: i. National Bank Modaraba Management Company Limited Nature of Relationship Nature of Business NBP Regional HQ Building 26 - McLagon Road, Lahore Management Company Managing and Floatation of Modarabas Transaction with Related Party Management Fee Rs. 3,382,029 Terms and Conditions 10% management fee is payable to National Bank Modaraba Management Company Limited, under section 18 of the Modaraba Companies & Modaraba (Floatation &Control) Ordinance, 1980 ii. National Bank of Pakistan Nature of Relationship: Nature of Business: Main Branch, The Mall, Lahore Holding Co. of Management Co. Commercial Banking Transaction with Related Party Currency of Transaction Pak Rupees Current Account (NIDA) Running Balance Rs, 9,133,036 Long Term Musharika Finance Rs. 272,500,000 Short Term Musharika Finance Rs, 133,636,991 Ijarah facility provided to National Bank Rs. 14,865,073 Terms and Conditions: Long Term Musharika Finance: These two facilities have been availed from National Bank of Pakistan. The limits are of Rs 250 million and Rs. 200 million. The first facility is repayable in six equal semi annual installments in arrears. The repayments are inclusive of profit which has been determined taking into consideration six months KIBOR (prevailing 2 days prior to the commencement of the semi annual period for which profit is being charged) plus a spread of 1% p.a with a floor of 3% and Ceiling of 5%p.a. The profit is payable semi annually in arrear. The facility is secured against the First Hypothecation charge on all present and future assets of the Modaraba for not less than Rs. 278 million, ranking pari passu with other secured creditors. The second facility is payable in 10 equal quarterly installments in arrear after a grace period of six months, within a total period of three years from the date of drawdown. The repayments are inclusive of profit which has been calculated taking into consideration 3 months average KIBOR plus a spread of 0.5% p.a. The facility is secured against first pari passu hypothecation charge on leased assets amounting to Rs. 222 million. 11

13 Annual Report 2006 Short Term Musharika Finance: The facility has been availed from National Bank of Pakistan. The limit is of Rs 150 million to be used to finance the working capital requirements of the Modaraba, repayable within one year. The profit is payable quarterly which has been determined taking into consideration one month KIBOR (prevailing on the last day of the month prior to which profit is being charged) plus a spread of 0.5% p.a. The facility is secured against the First pari passu hypothecation charge on current assets of the Modaraba amounting to Rs. 167 million. Ijarah facility to National Bank of Pakistan: Modaraba has provided Ijarah facilities to National Bank of Pakistan for 4 vehicles during the year. The total tenure of the facilities is 3 years and the rentals are payable quarterly. The pricing ranges from 11.59% to 12% per annum. Method Adopted for Determining Transfer Price: Transactions are carried out at an arm's length in the normal course of business. The method used for computation of consideration is comparable uncontrolled price method. iii. Taurus Securities Limited Nature of Relationship Room No 618, 6th Floor, Karachi Stock Exchange Building, Karachi Subsidiary of National Bank of Pakistan Nature of Business Member Karachi Stock Exchange and deals in shares brokerage Transaction with Related Party Purchase and Sale of Listed Securities Rs. 964,086,000 Payment of Commission Rs. 725,416 Terms and Conditions Ordinary course of business Method Adopted for Determining Transfer Price: Transactions are carried out at an arm's length in the normal course of business. The method used for computation of consideration is comparable uncontrolled price method. For and on behalf of the Board of Directors DIRECTOR DIRECTOR 12

14 First National Bank Modaraba CERTIFICATE ON TRANSFER PRICING POLICY FOR THE YEAR ENDED JUNE 30, 2006 It is hereby certified that the Modaraba has: I. recorded all transactions with related parties undertaken during the financial year ended June 30,2006 on arm's length price using valuation modes, as admissible in the best interests of the Modaraba in the books of account of the Modaraba and the record of related party transactions; ii. iii. duly filed with the Commission all required periodic returns in respect of related parties, which completely and fully disclosed all related parties and transactions with those related parties during the financial year; provided all the aforesaid information, together with the minutes of the Board of Directors meetings wherein the valuation policy and the related party transactions were approved and the decisions of the Audit Committee ratifying the related party transactions, to the statutory auditors for the purposes of the audit. For and on Behalf of the Board Shafiq Khan Chief Executive Officer Dated: October 4,

15 Annual Report 2006 REVIEW REPORT TO THE CERTIFICATE HOLDERS ON STATEMENT OF COMPLIANCE WITH BEST PRACTICES OF THE CODE OF CORPORATE GOVERNANCE We have reviewed the Statement of Compliance with the best practices contained in the Code of Corporate Governance by the Board of Directors of National Bank Modaraba Management Company Limited (the Management Company) in respect of First National Bank Modaraba (the Modaraba) to comply with the Listing Regulations of the Stock Exchanges where the Modaraba is listed. The responsibility for compliance with the Code of Corporate Governance is that of the Board of Directors of the Management 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 Modaraba'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 Modaraba personnel and review of various documents prepared by the Modaraba to comply with the Code. As part of our audit of financial statements we are required to obtain an understanding of the accounting and internal control systems 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 Modaraba's compliance in all material respects, with the best practices contained in the Code of Corporate Governance as applicable to the Modaraba for the year ended June 30, M. YOUSUF ADIL SALEEM & CO. Chartered Accountants Lahore: October 4,

16 First National Bank Modaraba AUDITORS' REPORT TO THE CERTIFICATE HOLDERS We have audited the annexed balance sheet of First National Bank Modaraba as at June 30, 2006 and the related profit and loss account, cash flow statement and statement of changes in equity together with the notes forming part thereof (hereinafter referred to as the financial statements), 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. These financial statements are the modaraba company's (National Bank Modaraba Management Company Limited) responsibility who is also responsible to establish and maintain a system of internal control, and prepare and present the above said statements in conformity with the approved accounting standards as applicable in Pakistan and the requirements of the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980 (XXXI of 1980), and the Modaraba Companies and Modaraba Rules, Our responsibility is to express an opinion on these statements based on our audit. We conducted our audit in accordance with the auditing standards as applicable in Pakistan. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of any material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting policies and significant estimates made by the modaraba company, as well as, evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion and, after due verification, we report that: (a) (b) (i) in our opinion, proper books of accounts have been kept by the modaraba company in respect of First National Bank Modaraba as required by the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980 (XXXI of 1980), and the Modaraba Companies and Modaraba Rules, 1981; in our opinion: the balance sheet and profit and loss account together with the notes thereon have been drawn up in conformity with the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980 (XXXI of 1980), and the Modaraba Companies and Modaraba Rules, 1981, and are in agreement with the books of accounts and are further in accordance with the accounting policies consistently applied; (ii) (iii) the expenditure incurred during the year was for the purpose of the modaraba's business; and the business conducted, investments made and the expenditure incurred during the year were in accordance with the objects, terms and conditions of the modaraba; (c) (d) in our opinion and to the best of our information and according to the explanations given to us, the balance sheet, profit and loss account, cash flow statement and statement of changes in equity together with the notes forming part thereof conform with approved accounting standards as applicable in Pakistan, and, give the information required by the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980 (XXXI of 1980), and the Modaraba Companies and Modaraba Rules, 1981, in the manner so required and respectively give a true and fair view of the state of the modaraba's affairs as at June 30, 2006 and of the profit, its cash flows and changes in equity for the year then ended; and in our opinion, no Zakat was deductible at source under the Zakat and Ushr Ordinance, 1980 (XVIII of 1980). Lahore Date: October 4, 2006 M. YOUSUF ADIL SALEEM & CO. Chartered Accountants 15

17 Annual Report 2006 BALANCE SHEET AS AT JUNE 30, Note Rupees Rupees ASSETS Current Assets Bank balances 3 13,476,172 11,079,558 Advances, prepayments and other receivables 4 142,226,518 92,750,693 Short-term investments 5 42,573,263 33,566,929 Short-term morabaha investment 6 535,000, ,342,979 Short-term musharaka investment 7 30,000,000 - Current portion of non-current assets 8 413,483, ,306,159 1,176,759, ,046,318 Non - current assets Net investment in ijarah 9 837,157, ,898,560 Long-term morabaha investment 10 25,518,638 - Long-term musharaka investment Long-term loans and deposits , ,093 Deferred costs 13 4,840,085 6,829,205 Fixed assets 14 1,274,756 1,718, ,601, ,034,872 Total Assets 2,046,360,472 1,206,081,190 LIABILITIES Current liabilities Creditors, accrued and other liabilities 15 42,068,357 19,784,414 Short-term finances ,544, ,753,000 Current portion of long-term liabilities ,720, ,000,000 Taxation , ,332, ,990,483 Long - term loans and deposits Long-term security deposits ,165,132 86,234,820 Long-term finance ,500, ,833,333 Total Liabilities 1,750,998, ,058,636 NET ASSETS 295,362, ,022,554 Represented by: CAPITAL AND RESERVES Certificate capital ,000, ,000,000 Reserves 45,362,450 15,022,554 CONTINGENCIES AND COMMITMENTS ,362, ,022,554 The annexed notes from 1 to 35 form an integral part of these financial statements CHIEF EXECUTIVE DIRECTOR DIRECTOR CHIEF FINANCIAL OFFICER Lahore: October 4,

18 First National Bank Modaraba PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED JUNE 30, 2006 REVENUE Note Rupees Rupees Income from ijarah 97,869,029 38,267,894 Profit on morabaha investment 45,651,733 8,109,719 Profit on musharaka investment 7,394,327 - Profit on bank deposits 419, ,814 Dividend income 3,395,150 2,896,350 Gain on sale of short-term investments 5,691,256 3,085,738 Other income , ,282 EXPENDITURES 160,735,588 53,338,797 Finance cost ,747,289 23,694,390 Operating expenses 25 12,794,114 11,025,253 Diminution / (Appreciation) in value of short-term investments 26 6,373,896 (30,188) 126,915,299 34,689,455 33,820,289 18,649,342 Modaraba company's management fee 3,382,029 1,864,934 PROFIT BEFORE TAX 30,438,260 16,784,408 Provision for taxation ,442 PROFIT FOR THE YEAR 30,438,260 16,602,966 Unappropriated profit brought forward 16,650,273 3,367,900 Profit available for appropriation 47,088,533 19,970,866 Appropriation : Transfer to statutory reserve 6,087,652 3,320,593 Unappropriated profit carried forward 41,000,881 16,650,273 EARNINGS PER MODARABA CERTIFICATE - BASIC AND DILUTED The annexed notes from 1 to 35 form an integral part of these financial statements. CHIEF EXECUTIVE DIRECTOR DIRECTOR CHIEF FINANCIAL OFFICER Lahore: October 4,

19 Annual Report 2006 CASH FLOW STATEMENT FOR THE YEAR ENDED JUNE 30, CASH FLOWS FROM OPERATING ACTIVITIES Note Rupees Rupees Profit before tax 30,438,260 16,784,408 Adjustment for: Depreciation / amortization 677, ,130 Amortization of deferred costs 1,989,120 1,989,120 Diminution / (Appreciation) in value of short-term investments 6,373,896 (30,188) Gain on sale of short - term investments (5,691,256) (3,085,738) Finance cost 107,747,289 23,694,390 Profit on bank deposits (419,309) (664,814) Dividend income (3,395,150) (2,896,350) 107,282,047 19,606, ,720,307 36,390,958 (Increase) / Decrease in operating assets Advances, prepayments and other receivables (49,320,055) (29,164,737) Short-term morabaha investment (267,657,021) (267,342,979) Short-term musharaka investment (30,000,000) - Investment in ijarah (400,072,650) (541,384,503) Security deposits from lessees 43,650,638 58,903,022 Long - term morabaha investment (52,793,536) - Long - term musharaka investment (31,000,000) - (787,192,624) (778,989,197) Increase / (Decrease) in operating liabilities Creditors, accrued and other liabilities 14,876,871 9,162,134 Cash generated from operations (634,595,446) (733,436,105) Finance cost paid (100,340,217) (14,490,813) Income taxes paid (486,705) (144,514) Dividend income received 3,330,047 2,983,225 Profit received on bank deposits 362,278 1,630,064 Net cash flow from operating activities (731,730,043) (743,458,143) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of fixed assets (234,199) (1,775,898) Long-term loans and deposits (309,680) (367,096) Short-term investments (9,787,337) 668,813 Net cash used in investing activities (10,331,216) (1,474,181) CASH FLOWS FROM FINANCING ACTIVITIES Long - term finances obtained 600,000, ,000,000 Repayment of long-term finances (173,333,334) (54,166,667) Increase in short-term finances 317,791, ,753,000 Net cash flow from financing activities 744,457, ,586,333 NET INCREASE / (DECREASE) IN CASH AND CASH EQUIVALENTS 2,396,614 (21,345,991) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 11,079,558 32,425,549 CASH AND CASH EQUIVALENTS AT END OF YEAR 3 13,476,172 11,079,558 The annexed notes from 1 to 35 form an integral part of these financial statements CHIEF EXECUTIVE DIRECTOR DIRECTOR CHIEF FINANCIAL OFFICER Lahore: October 4,

20 First National Bank Modaraba STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED JUNE 30, 2006 The changes in equity are as follows: Certificate capital Capital / Statutory reserve Net unrealized gain / (loss) in the value of securities available for sale Unappropriated profit Total reserves Total equity... Rupees... Balance as at June 30, ,000, ,975 (3,816,562) 3,367, , ,393,313 Profit for the year ,602,966 16,602,966 16,602,966 Transfer to statutory reserve - 3,320,593 - (3,320,593) - - Net unrealized losses in the value of securities available for sale - - (1,973,725) - (1,973,725) (1,973,725) Balance as at June 30, ,000,000 4,162,568 (5,790,287) 16,650,273 15,022, ,022,554 Profit for the year ,438,260 30,438,260 30,438,260 Transfer to statutory reserve - 6,087,652 - (6,087,652) - - Net unrealized losses in value of securities available for sale - - (98,364) - (98,364) (98,364) Balance as at June 30, ,000,000 10,250,220 (5,888,651) 41,000,881 45,362, ,362,450 Statutory reserve represents profit set aside to comply with the Prudential Regulations for Modarabas issued by the Securities and Exchange Commission of Pakistan. The annexed notes from 1 to 35 form an integral part of these financial statements CHIEF EXECUTIVE DIRECTOR DIRECTOR CHIEF FINANCIAL OFFICER Lahore: October 4,

21 Annual Report 2006 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, STATUS AND ACTIVITIES 1.1 First National Bank Modaraba "the Modaraba" is a multi purpose, perpetual and multi dimensional Modaraba formed under the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980 and rules framed there under and is managed by National Bank Modaraba Management Company Limited (a wholly owned subsidiary of National Bank of Pakistan), incorporated in Pakistan under the Companies Ordinance, 1984 and registered with Registrar of Modaraba Companies. The registered office of the Modaraba is situated at 5th floor, National Bank of Pakistan, Regional Headquarters Building, 26 - Mc Lagon Road, Lahore. The Modaraba is listed on Karachi and Lahore stock exchanges. The Modaraba commenced its business operations on December 04, 2003 and is currently engaged in various Islamic modes of financing and business including ijarah, Musharaka and Morabaha arrangements. 1.2 These financial statements are presented in Pak Rupees, which is the modarabas functional and presentation currency. 2 SIGNIFICANT ACCOUNTING POLICIES 2.1 Statement of compliance 2.2 Accounting convention 2.3 Ijarah accounting 2.4 These financial statements have been prepared in accordance with the approved accounting standards as applicable in Pakistan and the requirements of Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980, Modaraba Companies and Modaraba Rules 1981 and Prudential Regulations issued by the Securities and Exchange Commission of Pakistan (the Modaraba Regulations). Approved accounting standards comprise of such International Accounting Standards (IASs) as notified under the provisions of the Companies Ordinance, 1984 and made applicable to Modarabas under Modaraba Companies, Modaraba (Flotation and Control) Ordinance,1980. Wherever the requirements of relevant laws or directives issued by the Securities and Exchange Commission of Pakistan and the requirements of 'the Modaraba Regulations' differ from the requirements of these standards, the requirements of the relevant laws, directives and regulations take precedence. These financial statements have been prepared under the historical cost convention, except for the measurement at fair value of certain financial instruments in accordance with the requirements of International Accounting Standard - 39 " Financial Instruments: Recognition and Measurement ", wherever applicable. The principal accounting policies adopted are set out below. The Modaraba provides assets on ijarah arrangements to its clients under ijarah agreements as approved by the Religious Board. These ijarah are recorded in the books of accounts as finance lease in line with International Accounting Standard - 17 " Leases" as the "ijarah" arrangements approved by the Religious Board significantly resemble the "Finance Lease" as per IAS Amount due from lessees under finance leases are recorded as receivables at the amount of the net investment in the leases. Finance lease income is allocated to accounting periods so as to reflect a constant periodic rate of return on the net investment outstanding in respect of the leases. Net investment in ijarah is stated at present value of minimum lease payments. Impairment losses on nonperforming ijarah are recognized at higher of provision required in accordance with the Prudential Regulations for Modarabas or at a level which in the judgment of the management is adequate to provide for the potential ijarah losses. These losses can be reasonably anticipated as the difference between the carrying amount of receivables and present value of expected cash flows discounted at the rates implicit in the ijarah agreement. Creditors and other liabilities Creditors and other liabilities are carried at cost which is the fair value of the consideration to be paid in the future for goods and services received whether billed to the modaraba or not. 2.5 Provisions Provisions are recognized when the Modaraba has a present, legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount can be made. However, provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimates. 20

22 First National Bank Modaraba 2.6 Fixed assets Fixed assets are stated at cost less accumulated depreciation and impairment in value, if any. Depreciation is charged to income applying the straight-line method whereby the cost of an asset is written off over its estimated useful life. Full year's depreciation is charged on assets acquired during the year, while no depreciation is charged in the year of disposal, sale. Maintenance and repairs are charged to income as and when incurred. Major renewals and improvements are capitalized. The assets replaced, if any, are retired. Gain or loss on disposal of fixed assets are taken to profit and loss account. 2.7 Fixed assets - Intangible Intangible assets are stated at cost less accumulated amortization and accumulated impairment losses if any. Amortization is recorded when these assets are available for use using straight line method whereby the cost of an asset is written off over its estimated useful life. 2.8 Investments All investments, other than investments at fair value through profit or loss, are initially recognized on trade-date at cost, comprising of fair value of consideration and transaction cost directly attributable to cost. Its classification is made on the basis of intended purpose of holding such investment. The subsequent measurement on the balance sheet date is carried out on the following basis: Held for trading These are securities which are either acquired for generating a profit from short - term fluctuation in prices or are securities included in a portfolio in which a pattern of short-term profit taking exists. These are measured at fair value and changes in carrying values are included in profit and loss account. Available for sale Investment securities held by the Modaraba which may be sold in response to needs for liquidity or changes in interest rates or equity prices are classified as available for sale. These are stated at fair value and surplus / (deficit) on revaluation of investment being unrealized gain/ (loss) is taken directly to equity until sold or otherwise disposed off at which time, the cumulative gain or loss previously recognized in equity is included in profit and loss account. Held to maturity Held to maturity investments are financial assets with fixed or determinable payments and fixed maturity that the Modaraba has the positive intent and ability to hold to maturity. These are initially recognized at cost inclusive of transaction cost and are subsequently carried at amortized cost using effective interest rate method. Surplus / (deficit) arising due to fluctuation in fair value is taken to profit and loss account. Derecognition All investments are de - recognized when the rights to receive cash flows from the investments have expired or have been transferred and the Modaraba has transferred substantially all risks and rewards of ownership. 2.9 Other receivables Known impaired debts are written off, while debts considered doubtful of recovery are fully provided for Morabaha and Musharaka investment Morabaha and musharaka investments are stated net - off of provision. Provision is recognized in accordance with Prudential Regulations for Modarabas or on the estimate of management, whichever is higher Cash and cash equivalents Cash and cash equivalents are carried in the balance sheet at cost. For the purpose of cash flow statement, cash and cash equivalents consist of cash in hand and balances with banks. 21

23 Annual Report Impairment The carrying amounts of the assets are reviewed at each balance sheet date to determine whether there is any indication of impairment of any asset or group of assets. If any such indication exits, the recoverable amount of that asset or group of assets is estimated and impairment losses are recognized in the profit and loss account Financial instruments The particular recognition methods adopted by the Modaraba are disclosed in the individual policy statements associated with each item of financial instruments. Financial assets Financial assets are initially recognized at their cost which is the fair value of the consideration given at the time when the Modaraba becomes a party to the contractual provisions of the instruments and subsequent to initial recognition, financial assets are carried at fair value except any financial asset whose fair value can not be reliably measured. A 'regular way' purchase or sale of financial asset are recognized using trade date accounting. Financial liabilities Financial liabilities are initially recognized at cost which is the fair value of consideration received at the time when the modaraba becomes a party to the contractual provisions of the instruments. After initial recognition, financial liabilities are carried at fair value, amortized cost or original cost as the case may be. Off - setting financial instruments Financial assets and financial liabilities are off - set and the net amount is reported in the financial statements only when the Modaraba has a legally enforceable right to set-off the recognized asset and liability and either intends to settle on a net basis or to realize the assets and settle the liabilities simultaneously. De - recognition Financial assets are de-recognized when the contractual rights to the cash flows from financial assets expire or the Modarba transfers the asset and substantially all risk and rewards of the ownership of financial assets. Financial liabilities are de-recognized when they are extinguished that is, when the obligation specified in the contract is discharged or cancelled or expired. Recognition of gains / (losses) Gain or losses if any, on realization or settlement / subsequent measurement and derecognition of financial assets and liabilities are included in net profit and loss in the period in which it arises. Impairment / un-collectibility of financial assets An assessment is made at each balance sheet date to determine whether there is an evidence that the financial asset or the group of financial assets may be impaired. If such evidence exists, the estimated recoverable amount of the asset/assets is determined and impairment loss is recognized for the difference between the recoverable amount and the carrying amount Revenue recognition Revenue is recognized on the following basis:- ii iii iv For Ijarah transactions, the unearned finance income is deferred and amortized to income over the term of ijarah, applying the annuity method to produce a constant rate of return on the net investment in ijarah. Unrealized ijarah income on potential lease losses is excluded from the income from ijarah operations in accordance with the requirements of Prudential Regulations for Modaraba issued by Securities and Exchange Commission of Pakistan. Profit on morabaha investment is recognised on pro-rata accrual basis, calculated on number of days funds are utilized. Return on deposits with bank is recognized on accrual basis. Profit on investment under musharaka arrangements is recognized on accrual basis and additional profit,if any, is recognized on declaration by the investee company in accordance with terms of issue. v vi Dividend income is recognized when the right to receive dividend is established. Income from fee and commission is recognized as and when it becomes due. 22

24 First National Bank Modaraba 2.15 Borrowing costs Borrowing costs are recognized as an expense in profit and loss account in the period in which they are incurred Taxation Current Under the current tax law, the income of non-trading Modarabas is exempt from Income Tax provided that they distribute ninety percent of its profits as cash dividend to the certificate holders out of current year's total profit after appropriating statutory reserves. Where such profit is not distributed, provision for tax is made on taxable income at the current tax rates applicable to Modaraba after taking into account the available tax exemptions and tax credits, if any. Deferred Deferred tax is provided using the liability method for all temporary differences at the balance sheet date between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax assets, if any, are recognized to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, unused tax losses and tax credits can be utilized. Deferred tax liability, if any, is based on the expected tax rates applicable at the time of reversal of temporary differences Related party transactions Transactions with related parties are priced on arm's length basis. Prices for these transactions are determined on the basis of comparable uncontrolled price method, which sets the price by reference to comparable goods and services sold in an economically comparable market to a buyer unrelated to the seller Note Rupees Rupees 3 BANK BALANCES Current accounts - profit bearing Current accounts - non profit bearing Profit & loss sharing account 3.1 9,133,036 10,925,385 3,371,591 98, ,545 56,009 13,476,172 11,079, The balances in profit bearing accounts carry profit ranging between 1.5 % to 2 % ( 2005: 1 % to 2.5 %) 4 ADVANCES, PREPAYMENTS AND OTHER RECEIVABLES Note Rupees Rupees Advance for ijarah - secured, considered good 126,169,212 83,347,709 Prepayments 183, ,408 Receivables from sale of shares - unsecured, considered good 17,241 3,013,350 Other advances and receivables - unsecured, considered good 657,502 82,080 Accrued profit on : - Morabaha investment 6,543,025 2,168,553 - Musharika investment 847, Ijarah 7,421,654 3,611,117 - Bank deposits 105,131 48,100 Dividend receivable 122,603 57,500 Tax deducted at source 159, , ,226,518 92,750,693 5 SHORT-TERM INVESTMENTS Held for trading Available for sale 19,644,370 16,103,316 22,928,893 17,463,613 42,573,263 33,566,929 Detail of short-term investments is given in "Annexure 1" which is an integral part of these financial statements. 23