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HIGHNOON LABORATORIES LIMITED

ANNUAL REPORT 1997

CONTENTS

COMPANY INFORMATION

Board of Directors

Mr. Jawaid Tariq Khan

(Chairman)

Mr. Tausif Ahmad Khan

Chief Executive)

Mr. Saeed Ahmad Chaudhry

Mr. Ghulam Hussain Khan

'Dr. Shamim Ahmad

Mr. Anees Ahmad Khan

Mrs. Zainub Abbas

Mst. Farhat Jabeen

Mr. S. Faiq Hussain

(Nominee PLHC)

Company Secretary

Mian Ahson Farooq

Auditors

M/s. Sidat Hyder Qamar Maqbool & Company

Chartered Accountants

Legal Advisors

M/s. Sardar Iqbal & Company

Attorneys at Law

M/s. Cornelius, Lane & Mufti

Advocates & Solicitors

Registered Office & Share Department

Mr. Khadim Hussain Mirza

Group Corporate Secretary

71-B, C-2, Gulberg-III, Lahore-54660 (Pakistan)

Phones: 5752732-33 TIx: 44516 HINON PK.

Fax: 92-42-5711715

Head Office & Plant

17.5 Kilometer, Multan Road, Lahore-53700 (Pakistan)

Phones: 7510023-27 (5 lines) TIx. 47681 HINON PK.

Fax: 92-42-7510037

e-Mail: hinoon@hnl.brain.net.pk

Bankers

Habib Bank Ltd.

Prime Commercial Bank Ltd.

Muslim Commercial Bank Ltd.

Metropolitan Bank Ltd.

National Bank of Pakistan

Habib Bank A.G. Zurich

Allied Bank of Pakistan Ltd.

Bank Al Habib Ltd.

NOTICE OF MEETING

NOTICE is hereby given that 14th ANNUAL GENERAL MEETING of HIGHNOON LABORATORIES LIMITED

will be held on Monday, December 29, 1997 at 11.00 A.M. at Head Office 17.5 K.M. Multan Road, Lahore

to transact the following business:

1. To confirm the minutes of last Extraordinary General Meeting held on August 04, 1997.

2. To receive, consider and adopt the annual Audited Accounts of the Company for the year ended

June 30, 1997, together with Directors' and Auditors' Reports thereon.

3. To approve payment of cash dividend @ 5% and issue of Bonus shares @ 10% to the shareholders

as recommended by the Board of Directors.

4. To appoint Auditors and fix their remuneration for the year ending June 30, 1998. The present

Auditors, M/s Sidat Hyder Qamar Maqbool & Company, Chartered Accountants, retire and being

eligible offer themselves for re-appointment.

5. To discuss any other business with the-'permission of the Chair.

NOTES:

1. Share transfer books of the Company will remain closed from December 23, 1997 to January 02,

1998 (both days inclusive).

2. A member entitled to attend and vote at this meeting may appoint another member as proxy to

attend and vote instead of him.

3. The instrument of proxy must be received at the Registered Office of the Company not less than 48

hours before the time of holding the meeting.

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

DIRECTORS' REPORT

Your Directors have pleasure in presenting the Fourteenth Annual Report of your Company together with

the Audited Accounts for the year ended June 30, 1997.

1. FINANCIAL HIGHLIGHTS

Rs. in million

Net profit before tax for the year

12.704

Taxation

7.633

----------

Profit after tax

5.071

Unappropriated profit brought forward

0.511

----------

5.582

Appropriation:

- Dividend

3.629

- Transfer to general reserve

1.500

----------

Unappropriated profit carried forward

0.453

==========

2. DIVIDEND

The Directors recommend that cash dividend at the rate of Rs. 0.50 per share be approved for the

year ended June 30, 1997.

3. BONUS SHARES

Directors recommend that Bonus Shares at the rate of 10% i.e. in the ratio of one share for every ten

shares held by the shareholders be issued for the year ended June 30, 1997.

4. EARNINGS PER SHARE

The after tax earnings per ordinary share of Rs. 10 was Rs. 0.70 (1996: Rs. 1.02).

5. BOARD OF DIRECTORS

The term of the present Board expired on September 3, 1997 and all the retiring directors have been

re-elected for a period of three years at the Extraordinary General Meeting held on August 4, 1997.

On September 3, 1997 Mr. Jawaid Tariq Khan relinquished the responsibilities of the Chief Executive.

He will, however, continue to be the Chairman of the Board. Mr. Tausif Ahamd Khan assumed the

responsibilities of the Chief Executive from the same date.

6. CHAIRMAN'S REVIEW

Chairman's Review on page 6 deals with the activities during the year. The Directors endorse the

contents of the Review.

7. PATTERN OF SHAREHOLDINGS

The pattern of shareholdings is detailed on page 31.

8. AUDITORS

The present Auditors, Messrs. Sidat Hyder Qamar Maqbool and Company, Chartered Accountants,

retire and, being eligible, offer themselves for re-appointment.

CHAIRMAN'S REVIEW

It gives me great pleasure to welcome you to the Fourteenth Annual

General Meeting of your Company.

BUSINESS REVIEW

The net sales for the year ended June 30, 1997 were Rs. 500.4 million,

including exports of Rs. 79.2 million. The local sales of Rs. 421.2 million

represents a healthy growth of almost 25% as compared to the previous

year, on annualized basis. This growth becomes even more remarkable

as it was achieved in extremely trying conditions detailed below.

During the year under review the country had differing economic policies which have adversely affected

the Company's operating results. The Finance Act 1996-97 imposed customs duty of 10% on import of raw

and packing materials. Moreover 5% sales .tax on imported as well as locally procured raw and packing

materials. Against the spirit of the Sales Tax Act, the Government withdrew from the Pharmaceutical industry

the facility of passing on sales tax to the consumer. Later the sales tax was enhanced to 10%. After strong

protests by the Pharmaceutical industry the Government, in February 1997, allowed them to charge the

consumers sales tax adjustment of upto 4%. In fact all this led to much confusion in the market, thus

affecting the sales. The sales tax on raw and packing materials has since been withdrawn in the 1997-98

Finance Act. However any positive effect of this step has been more than wiped out by 2 massive devaluations

of the Pak. Rupee within a short period of one year - about 8.5% in November 1996 and by another 8.7%

in October 1997. At the same time the country has continued to endure double digit inflation.

Although the present Government has taken a number of steps to encourage industrial growth, it saddens

me to report that the Pharmaceutical industry continues to be excluded from the moves to liberalize the

economy. The prices are still under strict control of the Government and nominal, if any, increases which

are granted, fall far short of what ~s necessary to cover the increase in cost resulting from the factors

mentioned earlier. The increase allowed in maximum retail price of medicines has been 26% during the last

three years whereas the increase in cost of inputs during the same period has been more than double of

this figure. It is earnestly hoped that sanity should prevail and the Pharmaceutical industry should be

allowed price increases commensurate with the increase in the cost of inputs.

Pharmaceutical industry is a critical industry hence the Government should take positive steps to strengthen

this industry. It is worth mentioning that the entire Pharmaceutical industry is faced with the problems

mentioned in the above para, particularly those for whom the quality of end products is most important.

MARKETING

During the year the marketing division was streamlined and restructured. Within its sales department a

dedicated cardiology team was raised to look after the entire cardiology range of the Company with the

objective of enhancing penetration in this strategically important therapeutic area. The other sales teams

were also restructured with a regional framework to improve control at the National level. Highnoon, with

the adoption of these improved product strategies has continued to progress with a competitive advantage

and has maintained its position as the leading National Pharmaceutical Company. Its strategic products

continue to maintain their strong positions in their respective therapeutic areas.

New Product Launches

During the year under review the following new products were launched:

Faverin 100 mg - launched as a line extension and has substantiated the sales of Faverin 50 mg.

Femoston - a hormone replacement therapy for menopausal

women. It has the potential to be a major breadwinner for the

Company.

Fluocari1180 mg - a specially formulated high fluoride toothpaste for children to provide protection against

caries. It was launched in March 1997 and has shown great acceptance by the dentists.

Synergy OD - an antihistamine, was launched in June 1997 and has been very well accepted by the

doctors.

Highnoon will be launching products of Syqthelabo in 1998. Synthelabo is the third largest French

Pharmaceutical group. Highnoon has signed an agreement with Synthelabo to market their products in

Pakistan on exclusive basis. Main therapeutic areas of specialization are Central Nervous System,

Cardiovascular and Internal Medicine.

Launches of two new molecules, one generic and one line extension are also planned for 1998.

Export

Our efforts to penetrate the export market have been very successful. I feel great pride in reporting that

during the year under review the Company exported medicines worth Rs. 79.2 million i.e. over 3.5 times

the value of exports in 1996. The Company has already received further orders for export of medicines

valued at over Rs. 100 million, which will, Inshallah, be fulfilled by April 1998. The Company is expecting

repeat orders worth Rs. 200 million during the second half of 1998. At the same time efforts for further

breakthrough for exports to about a dozen other countries are being vigorously pursued.

PRODUCTION

The Company has been highly receptive to the global voice for quality in the manufacturing industry

particularly the health care sector. A key strategic issue contributing towards quality during the review

period and continuing into the following period has been a clear information technology approach. There

has been integration of product design and material specifications, identification of specific products and

batches, analytical testing, references to externally supplied components, incorporation of manufacturing

process instructions, implementation of standard control procedures, project management status and

resource information. These integrated operations right from order entry through suppliers and manufacturing

and on into logistics have led to greater confidence at the distributor level in terms of guaranteed product

availability, quality and reliability.

The overall efficiency of the Company has been continuously increasing with automation of routine

procedures ensuring information availability, and enforcement of standard operating procedures.

As always the involvement of all personnel has been kept foremost through Human Resources programs

geared to development of motivated team that serves as a vital part for efficient running of the total system.

PROPOSED PLANS FOR THE NEXT YEAR

The expansion project for enhancement of plant

capacity has been progressing as planned. Main

emphasis has been on meeting the

internationally acceptable standards of GMP,

process flows, and the current environmental and

safety standards.

The first phase of expansion of the production area has been successfully completed. New machines for

this area including Granulator, Trough Mixer, Cubicle Mixer, Tablet Sifter, Capsule Polisher, Vibrating Screen,

and Tablet Deblistering machine have been delivered that will almost double the capacity of the solid

dosage forms. A new rotary tablet press ZP-25 will become operational by end December 1997, imparting

speed and flexibility to the tablet compression and design.

The expansion of production allied areas i.e. Packaging and Stores is underway and is scheduled for

completion by end June 1998. A new R&D laboratory presently under construction will start working by the

end of this expansion period. This laboratory will have the most sophisticated equipment required for a

continuous research on the existing and new products currently in pipeline.

EMPLOYEES

The Chairman of your Company gives full credit and places on record the highest appreciation for the hard

work and dedication displayed by the employees as without their untiring efforts your Company would not

have achieved these results.

AUDITORS' REPORT TO THE MEMBERS

We have audited the annexed balance sheet of HIGHNOON LABORATORIES LIMITED as at 30 June 1997

and the related profit and loss account and statement of sources and application of funds, 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

and, after due verification thereof, we report that:

a) in our opinion, proper books of account have been kept by the Company as required by the

Companies Ordinance, 1984;

b) in our opinion:

i) the balance sheet and profit and loss account 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 the Company;

balance sheet and profit and loss account and the statement of sources and application of funds,

together with the notes forming part thereof, 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 30 June 1997 and of the profit and changes in sources and application

of funds for the year then ended; and

(d) in our opinion, Zakat deductible at source under the Zakat and Ushr Ordinance, 1980, was deducted

by the Company and deposited in the Central Zakat Fund established under Section 7 of that

Ordinance.

SIDAT HYDER QAMAR MAQBOOL & CO

LAHORE: NOV 25, 1998

CHARTERED ACCOUNTANTS

BALANCE SHEET AS AT 30 JUNE 1997

Note

1997

1996

Rupees

SHARE CAPITAL

72,583,830

65,985,300

RESERVES

39,657,790

45,416,170

Reserve for issuance of bonus shares

7,258,380

6,598,530

UNAPPROPRIATED PROFIT

452,593

510,663

----------

Shareholders' equity

119,952,593

118,510,663

SURPLUS ON REVALUATION OF FIXED ASSETS

67,532,938

68,809,377

REDEEMABLE CAPITAL

609,682

2,839,058

LONG TERM LOANS

1,976,910

LIABILITIES AGAINST ASSETS SUBJECT

TO FINANCE LEASE

17,130,961

14,889,091

DEFERRED LIABILITIES

14,506,123

11,084,715

LONG TERM ADVANCES AND DEPOSITS

6,116,181

7,757,361

CURRENT LIABILITIES

----------

Shod term bank borrowings

166,793,612

t68,959,311

Current portion of long term liabilities

15,945,926

16,218,810

Creditors, accruals, advances and other

liabilities

48,355,513

44,055,013

Proposed Dividend

3,629,192

6,598,530

----------

Total Current Liabilities

234,724,243

235,831,664

CONTINGENCIES AND COMMITMENTS

----------

462,549,631

461,698,839

==========

Note:

1. The Auditors' Report to the members is annexed hereto.

2. The annexed notes form an integral part of these accounts.

OPERATING FIXED ASSETS

227,332,064

187,328,835

CAPITAL WORK IN PROGRESS

10,463,430

15,609,183

----------

237,795,494

202,938,018

LONG TERM INVESTMENTS

4,119,500

9,500

LONG TERM DEPOSITS

108,765

DEFERRED COST

830,689

1,384,608

CURRENT ASSETS

----------

Stores, spares and loose tools

4,406,558

2,603,883

Stock-in trade

136,155,323

111,522,203

Trade debtors

7,268,891

5,803,250

Advances, deposits and prepayments

32,722,357

24,272,547

Other receivables

33,849,239

50,273,547

Short term investment

40,001,940

Cash and bank balances

5,292,815

22,780,578

----------

Total Current Assets

219,695,183

257,257,948

----------

462,549,631

461,698,839

PROFIT AND LOSS ACCOUNT

FOR THE YEAR ENDED 30 JUNE 1997

12 MONTHS

18 MONTHS

ENDED

30 JUNE

Note

1997

1996

Rupees

SALES

500,418,998

529,500,346

COST OF SALES

319,933,872

334,025,925

----------

Gross profit - Manufacturing

180,485,126

195,474,421

Gross profit - Trading

1,865,734

1,191,858

----------

GROSS PROFIT

182,350,860

196,666,279

OPERATING EXPENSES

Administrative and general

50,676,991

67,419,180

Selling and promotional

81,359,643

63,789,205

Research and development

2,664,259

3,604,971

----------

Total operating expenses

134,700,893

134,813,356

----------

OPERATING PROFIT FOR THE YEAR

47,649,967

61,852,923

OTHER INCOME

8,737,111

2,698,475

----------

56,387,078

64,551,398

FINANCIAL AND OTHER CHARGES

43,682,731

45,404,743

----------

PROFIT BEFORE TAXATION

12,704,347

19,146,655

TAXATION

7,633,225

12,419,853

----------

PROFIT AFTER TAXATION

5,071,122

6,726,802

UNAPPROPRIATED PROFIT BROUGHT FORWARD

510,663

382,391

----------

PROFIT AVAILABLE FOR APPROPRIATIONS

5,581,785

7,109,193

APPROPRIATIONS:

----------

Interim dividend: Nil (1996: @ 10%)

6,598,530

Proposed final dividend @ 5 % (1996: Nil)

3,629,192

Transferred to 9eneral reserves

1,500,000

----------

5,129,192

6,598,530

UNAPPROPRIATED PROFIT CARRIED

----------

TO BALANCE SHEET

452,593

510,663

==========

Note: The annexed notes form an inte9ral part of these accounts,

STATEMENT FOR SOURCES AND APPLICATION OF FUNDS

FOR THE YEAR ENDED 30 JUNE 1997

12 MONTHS

18 MONTHS

ENDED

30 JUNE

Note

1996

Rupees

CASH FLOW FROM OPERATING ACTIVITIES

Cash generated from operations

72,748,217

47,034,678

Add/(less):

Long term deposits

(6,300)

Taxes paid

(16,578,122)

(18,970,055)

Financial charges paid

(42,620,235)

(41,218,614)

----------

Net cash flow from operating activities

13,549,860

(13,160,291)

CASH FLOW FROM INVESTING ACTIVITIES

----------

Fixed capital expenditure

(45,318,516)

(27,064,143)

(Including capital work in progress)

Sale proceeds of fixed assets

6,341,704

3,789,380

Short term investment

45,058,958

(40,001,940)

Long term investments

(4,110,000)

----------

Net cash flow from investing activities

1,972,146

(63,276,703)

CASH FLOW FROM FINANCING ACTIVITIES

Repayment of non-participatory redeemable capital

(3,239,376)

(7,583,261)

Long term advances

(1,641,180)

2,916,594

Repayment of debentures and long term loans

(427,966)

(2,325,141)

Repayments of liabilities against assets subject to