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HINOPAK MOTORS LIMITED

ANNUAL REPORT 1997

CONTENTS

COMPANY INFORMATION

Board of Directors

Keith S. Stack

(Chairman)

C.D.W. Leitch

Shah Jalil Alam

Nazir Ahmed Shaikh

Kunwar Idris

Masamichi Yoshimizu

Kanji Kawamura

Hajime Atsumi

Hasan Irshad

(Managing Director & Chief Executive)

Company Secretary

Mohammad Z. A. Syed

Bankers

ABN - AMRO Bank

Allied Bank of Pakistan Limited

American Express Bank Limited

Bank of America NT & SA

Credit Agricole Indosuez

Habib Bank Limited

Hongkong & Shanghai Banking Corporation Limited

National Bank of Pakistan Limited

Societe Generale - The French & International Bank

Standard Chartered Bank

The Bank of Tokyo - Mitsubishi, Limited

Auditors

A. E Ferguson & Co.

Legal Advisors

Kabraji & Talibuddin

Registered Office

D-2, S.I.T.E., Manghopir Road,

P.O. Box No. 10714, Karachi-75700, Pakistan.

NOTICE OF MEETING

NOTICE IS HEREBY GIVEN that the Twelfth Annual General Meeting of the shareholders of Hinopak

Motors Limited will be held at the Crystal Ballroom, Karachi Marriott Hotel, Abdullah Haroon Road,

Karachi on Wednesday, 26th November, 1997 at 11.00 a.m. to transact the following business:

ORDINARY BUSINESS

(1) To receive and consider the Audited Accounts of the Company for the financial year ended

30th June, 1997, together with the Report of Directors and Auditors.

(2) To appoint Auditors for the year 1997-98 and to fix their remuneration. The retiring Auditors

Messrs. A. F. Ferguson & Co., Chartered Accountants being eligible, offer themselves for

re-appointment.

(3) To approve, as recommended by the Board of Directors, the final cash dividend at the rate of

25% i.e. Rs. 2.50 per share for the year ended 30th June, 1997.

SPECIAL BUSINESS

(4) To consider, and if thought fit, to pass the following resolution as a Special Resolution:

RESOLVED THAT as required by Article 45 of the Articles of Association of the Company, the

borrowing powers of the Directors are hereby increased from Rs. 500 million to Rs. 900 million.

FURTHER RESOLVED THAT Article 45 be amended by deleting the words "exceed the issued

share capital for the time being of the Company" in line 9 and 10 and replacing it with the

following "exceed Rs. 900 million".

A statement under Section 160 of the Companies Ordinance, 1984 setting forth all material facts

concerning the Resolution contained in item (4) of the Notice which will be considered for adoption at the

Meeting is annexed to this Notice of Meeting being sent to Members.

Notes

i) A member entitled to attend and vote at this General Meeting is entitled to appoint a Proxy to

attend, speak and vote in his place at the Meeting. Instrument appointing a proxy must be

deposited at the Registered Office of the Company at least forty eight hours before the time of

the Meeting.

ii) The Share Transfer Books of the Company will remain closed from 12th November, 1997 up to

26th November, 1997 (both days inclusive). Transfers received in order by the Company

Secretary, Hinopak Motors Limited, D-2, S.I.T.E., Manghopir Road, P.O. Box 10714,

Karachi-75700, Pakistan upto the close of business on Tuesday 11th November, 1997 will be in

time to be passed for entitlement of Dividend to the transferees. The Share Transfer Books will

re-open on Thursday, 27th November, 1997.

iii) The Shareholders are requested to intimate any changes in their addresses to The Company

Secretary, Hinopak Motors Limited, D-2, S.I.T.E., Manghopir Road, P.O. Box 10714,

Karachi-75700, Pakistan.

Statement Under Section 160 of the Companies Ordinance, 1984

This Statement is annexed to the Notice of the Twelfth Annual General Meeting of the Shareholders of

Hinopak Motors Limited to be held on 26th November, 1997 at which certain special business is to be

transacted.

The special business [Item (4) of the Notice of Meeting] is the proposed increase in the borrowing power

of Directors on behalf of the Company. The purpose of this statement is to set forth the material facts

concerning this special business.

The Articles of Association of Hinopak Motors Limited are proposed to be amended by the above

mentioned special resolution at the Twelfth Annual General Meeting of the Shareholders of Hinopak

Motors Limited. The increase in borrowing power of the Directors is being recommended due to the

continued devaluation of the Pakistan Rupee and increase in the cost of CKD kits from Japan.

No Director is personally interested directly or indirectly in this business except to the extent of his

shareholdings in the Company.

CHAIRMAN'S REVIEW

It is my privilege to welcome you to the Twelfth

Annual General Meeting of the Company and

present you the report on the performance of your

Company for the financial year ended 30th June,

1997.

OPERATING RESULTS

The trading environment was severely impacted in

November 1996 by the sudden removal of the then

Government. Business confidence did not even

begin to improve until the elected Government took

office in March 1997. During the interim period,

with all eyes focused on the political arena, the lack

of economic activity significantly damaged the

already fragile economy of Pakistan. Despite the

efforts of the new Government by announcement

of numerous incentive packages, business activity

has not returned to the levels prevailing prior to

November 1996. Changes in Government

spending due to IMF conditions also had an

adverse impact on business between the private

sector and the Government and its related

organizations. All these developments combined to

create extremely difficult business conditions for

the automobile industry in Pakistan.

At the same time, the continued depreciation of the

Pakistani Rupee against the U.S. Dollar and the

Japanese Yen; and increase in interest rates to

curtail monetary expansion and the fiscal deficit to

meet IMF conditions, resulted in an increase in

inflationary pressure on costs.

These factors together caused a decline of no less

than 60% in chassis sales in the second half of the

year. This resulted not only in a massive decline in

revenue, and hence gross profit, but also left very

substantial unrecovered production overhead as

production was commensurately cut back.

Thus, Operating Profit was completely eroded

in the second half, emerging for the year at

Rs. 155 million.

Sales revenue for the year under review declined

by 9.2% to Rs. 2,360 million. This decrease was

entirely attributable to the lower sales and change

in sales mix in the second half of the year. The net

reduction in revenues of Rs. 238 million, compared

with the previous year, was due to an overall 20%

reduction in chassis sales to 1,365 units, and a

12% reduction in sales of bus and truck bodies to

290 units. However, spare parts sales had an

exceptional year, and sales revenue increased by

53% to an impressive level of Rs. 136 million.

Financial Charges increased to Rs. 62.5 million in

1996-97 from Rs. 13.2 million in 1995-96. The

steep increase in Financial Charges was due to

increased borrowings used to finance increased

working capital requirements as follows:

* To finance increase in stocks by Rs. 423

million.

* To finance payments of foreign bills of Rs. 189

million.

* To finance reduction in customers' credit

balances by Rs. 222 million.

As a consequence of the poor second half results,

pre-tax profit for the year was cut to Rs. 103 million,

54% lower than the previous year. An increase of

24% in the effective tax rate was mainly due to full

utilization of accumulated losses in 1995-96.

Therefore, profit after tax declined to Rs. 56.9 million

a 68% decrease compared with the previous year.

SALES AND MARKET CONDITIONS

The Company's medium and heavy duty trucks

have held the top position in Pakistan since 1988,

representing ten years of leadership. Amid

intensifying competition, a great many professional

driver-owners and companies continue to choose

Hino trucks, a testament to our product excellence

and reliability.

As you are aware, your Company launched a

technically superior, new Super Flyer Series of

trucks and AKMA series of buses in April 1996.

The new product range received a favourable

response in the market; still, due to low economic

activity in the second half of the year, movement of

transportable goods from the ports to up-country

steadily declined, providing little incentive for

transporters to invest in new vehicles.

The market has been further eroded by the import

of reconditioned vehicles as well as illegal imports

of trucks from Iran combined with semi-knocked

down vehicles imported under the guise of scrap

metal. Moreover, some of our competitors resorted

to sharp price reductions and also offered their

vehicles on credit, adversely affecting the already

depressed market.

Your Company's efforts in harnessing the export

markets bore fruit when Hinopak procured a

sample order for two AK176SA Roadliner non air-

conditioned buses for Mauritania. Hinopak is

consistently striving to make further inroads into

the export market, and is actively pursuing the

possibilities of further exports to the Middle East

and Africa.

PRODUCT SUPPORT

The Company continued its efforts towards

establishing a countrywide network of classical 3S

dealerships. In Karachi, such a dealership was

inaugurated at Maqbool Motors. The Company

plans to set up 3S dealerships in all the major

commercial centres of Pakistan; this will

supplement Hinopak's existing product support

network.

The Mobile workshops continue to play a vital role

in supporting our products in the remotest regions

of the Country.

DESIGN & DEVELOPMENT

Your Company continued its efforts to gain higher

market share of the body fabrication market by

following the policy to broaden the product range.

The achievements included the design and

development of a semi trailer with a loading

capacity of 40 feet or two 20 feet marine

containers; a Cargo Truck, with a payload capacity

of 3.0 tons and a body weight of 1.3 tons only,

within the overall G.V.W. of 8.5 tons; and a

Metroliner, medium size AC bus, built on the FB

chassis, with a seating capacity for 22-24 persons.

PRODUCTION

The year started with the regular production of new

model truck and bus chassis. Being a new model,

major adjustments in the production operation

were carried out for smooth running of production

and to achieve better productivity without affecting

quality.

The Assembly Operation Plant produced 1,370

units in 1996-97 compared to 1,715 units in

1995-96, whilst Body Operation Plant produced

300 units in 1996-97 as against 337 units during

1995-96. The production was lower compared with

last year due to lower market demand.

The Company continued to invest in new

technologies and capabilities and also upgrading

of existing capacity.

TECHNICAL DEPARTMENT

The Technical Department actively pursued

its function of bringing the product range in

line with market demand. After the launch of the

"Super F series" trucks, surveys were conducted

to ensure that all customers' needs were fulfilled

keeping in mind the local conditions.

LOCALIZATION AND DELETION PROGRAMME

Once again the Company successfully met the

Government's localization targets for various Hino

models for the year ended 30th June,1997.

This year the localization targets reached as high

as 55%, despite low production activity, which did

not enable your Company to give large orders to

vendors as an incentive for development.

The depressed market conditions have adversely

affected our vendors, particularly the smaller ones.

The Company is making every effort to help the

vendors wherever possible as they have put in a lot

of effort and investment to make our deletion

programme successful.

ISO-9000 CERTIFICATION

The Company has established its Quality

Management System as per ISO 9000

requirements, and following the Certification Audit

conducted during the first half of 1997, the

Company has been awarded the ISO 9001

certificate, valid upto the year 2000. As a result,

Hinopak has become the first automobile company

in Pakistan and also the first among Hino affiliates

worldwide to have been awarded the ISO-9001

Certification.

COMPUTERIZATION

The Company has implemented its integrated

Manufacturing and Financial Software System,

which enables management to monitor production,

material availability and job costing. This new

version of software, known as CP System, was

installed on the latest IBM AS 400 model 150 mini-

computer. Both the CP system and the new IBM

AS400 support the year 2000 dates.

In order to monitor purchase of production-related

items and their availability, all Purchase Orders are

now generated through the CP System. This

enables the Management to review Purchase

Order status on line.

LABOUR MANAGEMENT RELATIONS

As in the past Labour Management Relations

continued to be cordial. On 26th June, 1997 a new

Union Agreement was signed between the CBA

and the Management of the Company. This

agreement has been signed for two years ending

30th June, 1999.

STAFF WELFARE, SPORTS & RECREATION

FACILITIES

The 7th Hinopak Trophy KCCA inter-firms cricket

tournament generated immense enthusiasm

The Company's football team for the first time

participated in the Karachi League alongwith the

top 20 teams of Karachi and secured 5th position.

Inter-departmental table tennis, chess and other

sports competitions were also held enabling

employees to participate in various sports events.

PRODUCTIVITY AND HOUSE KEEPING

TROPHY

In order to encourage employees to improve

productivity and to maintain better house keeping,

an annual competition was arranged among the

various departments during the year. All the

departments participated in the productivity

improvement competition. These activities generated

interest and motivation among the employees for

various initiatives in productivity and house keeping

improvement throughout the Company.

FUTURE OUTLOOK

We believe that the economy has now passed

through the worst period. The automobile industry

is gradually emerging from an acute slump in

demand. Sales are likely to increase as there has

been some movement in the market over the past

few months, and the trend is likely to get better as

Government will be importing fertilizer, wheat and

other bulk commodities in the next few months.

Local freight rates have also been raised giving ~

transporters a better return on their investments

Thus, whilst results for the first half of the current

year will still be poor, an improving trend is

expected in the balance of the year.

The Company has recently received inquiries from

Africa for export of trucks and buses. The potential

is good provided we get further tax rebates from

the Federal Government. This matter is being

pursued with the Government and is likely to bear

fruit in the near future. The overall scenario is much

better today than it was a few months ago.

It is hoped that with greater political stability in the

Country, and with the Economic Packages

announced by this Government, confidence in the

economy will be restored, resulting in better sales

opportunities.

Management continues to seek suitable products

for assembly in its plant to utilize the spare

capacity and to bring down the manufacturing

costs of its main Hino models.

ACKNOWLEDGMENTS

Finally, I would like to thank my colleagues on the

board, employees at all levels, CBA officials,

Japanese advisors and vendors for their hard

work, dedication and commitment in contributing

towards achievement of these results during a year

of unprecedented difficulties. I am particularly

appreciative of our dealers and customers for their

continued support and loyalty to Hino vehicles.

KEITH S. STACK

CHAIRMAN

Karachi: 1st October, 1997

DIRECTORS' REPORT

The Directors of Hinopak Motors Limited take pleasure in presenting this report, together with the

Accounts of the Company for the year ended 30th June, 1997 and recommend the appropriations

detailed below:

1997

1996

(Rupees '000)

OPERATING RESULTS

Profit before taxation

102,705

222,127

Provision for taxation

(45,795)

(46,018)

----------

Profit after taxation

56,910

176,109

UNAPPROPRIATED PROFIT BROUGHT FORWARD

972

1,267

----------

Profit available for appropriations

57,882

177,376

LESS: APPROPRIATIONS

Transfer to Revenue Reserve

(24,000)

(102,000)

----------

Proposed Stock Dividend

Nil

(1996 @ 20%

(20,668)

Tax on Stock Dividend

Nil

(1996 @ 10%

(2,067)

Interim Cash Dividend

Nil

(1996 @ 15%

(15,501)

Final Cash Dividend - proposed @ 25%

(1996 @ 35%

(31,001)

(36,168)

----------

Total Distribution for the year

(31,001)

(74,404)

----------

UNAPPROPRIATED PROFIT CARRIED FORWARD

2,881

972

==========

DIRECTORS

Since the review in the last Directors' Report in October, 1996, there has been no change in the number

of Directors and the individuals on the Board.

INVESTMENTS

Hinopak Motors Limited has contributed Rs. 375,000 being 25% share of the total investment towards the

equity participation in Automotive Testing and Training Centre (AT&TC); this is a newly incorporated

private limited company with an authorised share capital of Rs. 30.0 million. AT&TC has invited tenders

for the construction of their Main Building and Ancillary Works. The construction is planned on a plot of

land measuring half an acre; this is to be sub-leased out of PACO's estate in Pakistan Steel's Down

Stream Industrial Area. AT&TC has also taken overall testing machinery and some of the personnel of

Vendor Development and Training Cell (VDTC) of PACO.

AUDITORS

The Auditors, Messrs. A. F. Ferguson & Co., retire at the conclusion of the Twelfth Annual General Meeting

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

PATTERN OF SHAREHOLDINGS

The Pattern of the shareholdings of the Company as at 30th June, 1997 is given on page 39.

HOLDING COMPANY

Al-Futtaim Industries (Private) Limited of Dubai, U.A.E. continues to hold 59% of Company's shares and

is the Holding Company of Hinopak Motors Limited.

10 YEARS AT A GLANCE

Rupees in million

Year ended 30th, June

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

ASSETS & LIABILITIES

Net Assets

Fixed Operating Assets

82.56

81.92

91.23

126.66

134.60

163.14

205.77

201.01

165.84

184.62

Capital Work in Progress

0.37

2.20

2.34

3.52

3.02

3.31

14.85

7.53

Long Term Investments

2.00

5.00

5.38

Other Long Term Assets

4.46

3.64

4.42

6.82

9.59

24.13

28.63

28.32

31.87

34.10

Current Assets

293.77

417.57

482.67

774.46

650.25

1,027.82

947.80

816.43

1,281.70

1,530.13

Less: Current Liabilities

264.72

378.02

427.38

675.63

491.09

796.06

818.92

789.85

1,092.43

1,306.96

----------

Total Net Assets

116.44

127.31

153.28