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Net assets of Pelwatte Sugar Industries PLC recently taken over by parties connected to business leader Harry Jayawardena have slumped to less than half the company’s stated capital as of March 31, 2011, and the directors are recommending a Rs. 200 million capital infusion through a rights issue

Under terms of the Companies Law, an extraordinary general meeting of Pelwatte Sugar has been summoned for September 30 to table and discuss a report prepared by the directors in terms of Section 220 of the Companies Act No.7 of 2007. The financial position of the company will also be discussed at this meeting.

A report to shareholders signed by Messrs. D.H.S. Jayawardena and L.U.D. Fernando, directors of Pelwatte Sugar, said that the company had posted a loss of Rs.628.8 million as at March 31, 2011, up from a loss of Rs.444.2 million the previous year.

Consequent to these losses, the net asset position of the company as at March 31, 2011 has declined to Rs.262.2 million.

"At this level the net assets of the company as at March 31, 2011 was less than half of the company’s stated capital as of the said date," the report has said.

It explained that high administration cost together with high production related overheads were among the main causes for the losses with the 20% gross profit margin recorded by the company during the last financial year inadequate to cover administration expenses of Rs.522 million.

"The reduction in the gross profit was due to the increase in the purchasing price of cane together with a less than proportionate increase in the sugar selling prices," the report said.

"Reduction of the gross profit margin from 6.3% (Rs.123.4 million) in the last year to 2.0% (Rs.44.8 million) in the current year together with the increase in administrative expenses from Rs.391.1 million to Rs.522.2 million resulted in the loss recorded by the company."

The report said that the increase in the administrative expenses was mainly due to the increase in staff costs including gratuity as a result of granting the agreed revision of salaries and wages in 2010 and 2011.

Pelwatte’s management changed in the latter part of financial year 2010/11 with the purchase of a 47% stake in the company by Melstacorp Limited, a Harry Jayawardena company, and the board was subsequently re-constituted.

The re-constituted board anticipates restructuring the company to ensure the profitability of operations "within a reasonable period of time," the shareholders have been told.

Currently, the directors are focusing on improving the quality of productivity in the plantations with special attention paid to enhancing both labour productivity and machinery utilization.

"The financial strength of the main shareholders will also benefit the company reducing its financing costs," shareholders have been told.

The directors have explained that it takes longer to realize positive changes in an agriculture industry. They announced they were recommending raising Rs.200 million by way of a rights issue.