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ATLAS HONDA LIMITED

ANNUAL REPORT 1996-97

CONTENTS

Corporate Data

Notice of Annual General Meeting

Chairman's Review

Directors' Report

Auditors' Report to the Members

Balance Sheet

Profit & Loss Account

Statement of Changes in Financial Position

Notes to the Accounts

Pattern of Shareholding

Atlas Group Companies

Proxy Application

CORPORATE DATA

BOARD OF DIRECTORS

CHAIRMAN

Mr. Yusuf H. Shirazi

DIRECTORS

Mr. Aamir H. Shirazi

Mr. Aitzaz Shahbaz

Mr. Sherali Mundrawala

Mr. Satoshi Toshida

Mr. Sheikh Jahangir

Mr. Takemi Ishikawa

Company Secretary

Mr. Saleem Ahmed

EXECUTIVE COMMITTEE ·

GROUP

CHAIRMAN

Mr. Yusuf H. Shirazi

MEMBERS

Mr. Jawaid Iqbal Ahmed

Mr. Frahim Ali Khan

Mr. Iftikhar H. Shirazi

Mr. Aamir H. Shirazi

Mr. Saquib H. Shirazi

Secretary

Mr. Amjad Hussain

GROUP PERSONNEL COMMITTEE:

CHAIRMAN

Mr. Yusuf H. Shirazi

GROUP AUDIT COMMITTEE:

CHAIRMAN

Mr, Sanaullah Qureshi

COMPANY MANAGEMENT:

CHIEF EXECUTIVE OFFICER

Mr. Aamir H. Shirazi

TECHNICAL DIRECTOR

Mr. Takerni Ishikawa

DIRECTOR FINANCE

Mr. Saleem Ahmed

GENERAL MANAGER MARKETING

Mr. Nurul Hoda

GENERAL MANAGER HUMAN RESOURCES

Mr. Zamir Haider

AUDITORS:

Hameed Chaudhri & Co.

Chartered Accountants

LEGAL ADVISORS:

Mohsin Tayebaly & Co.

TAX ADVISORS:

Mahmood Law Associates

BANKERS & LENDING INSTITUTIONS:

BANKERS

LENDING INSTITUTIONS

Credit Agricole Indosuez

National Investment Trust Limited

Deutsche Bank AG

National Development Finance Corporation

Emirates Bank International Limited

Muslim Commercial Bank Limited

National Bank of Pakistan

The Bank of Tokyo-Mitsubishi Limited

United Bank Limited

REGISTERED & HEAD OFFICE:

1-McLeod Road, Lahore-54000

Tel: (92-42) 7225015-17, 7233515-17

Fax: (92-42) 7233518

FACTORIES:

KARACHI

SHEIKHUPURA

F-36, Estate Avenue, S.I.T.E.,

26-27 KM, Lahore-Sheikhupura Road,

Karachi-75730

Sheikhupura-39321

Tel: (92-21) 2575561-65

Tel: (92-4931) 6655-57, (92-42) 7222222

Fax: (92-21)2563758

Fax: (92-342) 354111

BRANCH OFFICES:

MULTAN OFFICE

WARRANTY & TRAINING CENTRES

Azmat Wasti Road, Multan

7-Pak Chambers,

Tel: 31990,571989, 72028

West Wharf Road, Karachi.

Fax: 541690

Tel: 2310142

RAWALPINDI OFFICE

10-C, Main Road,

Room 9, 2nd Floor

Gulshan-e-Ravi, Lahore

Sunny Plaza, Chandni Chowk,

Tel: 7463108

Murree Road, Rawalpindi

Tel: 455328

Azmat Wasti Road,

Fax: 847928

Multan

Tel: 72028

SHOW ROOM

West View Building,

Service Factory

Preedy Street, Saddar, Karachi.

366/A, Gulistan Colony No.2

Tel: 7720833, 7727607

Near Millat Chawk

Shaikhupura Road,

SPARE PARTS DIVISION

Faisalabad - 38700

D-181/A, Shershah Road,

S.I.T.E., Karachi

Tel: 2561615-16, 293929-30

Fax: 2561616

NOTICE OF ANNUAL GENERAL MEETING

The Thirty third Annual General Meeting of the Company will be held on Wednesday,

26 November 1997 at 10.30 A.M. at 1-McLeod Road, Lahore to transact the following business:

1. To confirm the Minutes of the Thirty Second Annual General Meeting held on

2 December, 1996.

2. To consider and adopt the Audited Accounts of Atlas Honda Limited together with the

Directors' and Auditors' reports for the year ended 30 June, 1997.

3.(a) To consider and approve the recommendation of Directors for cash dividend of 15%

(Rs. 1.50 per share) for the year ended 30 June , 1997 and for 10% Bonus issue

(One fully paid-up share for every ten shares held.)

(b) To consider and, if thought fit, pass with or without modification(s) the following:

Ordinary Resolution:

(i) "Resolved that a sum of Rs. 13,270,660 out of Company's Profits be capitalized

for issuing 1,327,066 fully paid ordinary shares of Rs. 10/- each as bonus shares

to be allotted to those shareholders whose names stand in the register of members

at the close of business on 15 November, 1997 in the proportion of one share for

every ten shares held by a member. The said shares shall rank pari passu with the

existing shares of the company as regards future dividends, and all other respects.

(ii) Further Resolved that in the event of any member holding shares which are less

than the number of which one bonus share is decided to be issued or in excess

by exact multiple thereof the Directors be and are hereby authorized to combine

them and to sell the bonus shares so combined in the stock market and to pay the

proceeds of sales thereof when realized to a charitable institution approved under

the Income Tax Ordinance, 1979.

(iii) Further Resolved that for the purpose of giving effect to the foregoing the Directors

be and are hereby authorized to give such directions as may be necessary and as

they deem fit to settle any question or any difficulties that may arise in the

distribution of the new bonus shares in the payment of the sale proceeds of the

fractions.

4. To appoint Auditors for the year 1997-98 and to fix their remuneration.

5. as may be placed before the meeting with

the permission of the chair.

N.B. Shareholders are requested to take note of the following:

BOOK CLOSURE

1. The share transfer book of the Company will be closed from 16 November, 1997 to

26 November, 1997 (both days inclusive).

PROXY

1. A member entitled to attend and vote at the Annual General Meeting is entitled to

appoint another member as a proxy to attend and vote on his/her behalf. Proxies in

order to be effective must be received at the Registered Office of the Company not

less than 48 hours before the time appointed for the meeting.

2. No person shall act as proxy unless he is member of the Company.

3. Signature of shareholder on Proxy Application must agree with the specimen signature

registered with the Company. Appropriate revenue stamp should be affixed on the

Proxy Application.

4. For the convenience of the shareholders a Proxy Application format is attached with

this report.

5. Shareholders are requested to immediately notify the Company of any change in their

addresses.

CHAIRMAN'S REVIEW

I take great pleasure to welcome you to this

Thirty Third Annual General Meeting and present

the Annual Report and review of the performance

of your Company for the year ended 30 June

1997.

THE ECONOMY

The Fiscal Year 1996-97 was one of the most

difficult years in the economic history of Pakistan.

Most economic indicators showed a trend of

decline. During the year, the GDP growth was

3.1%, a decline against the growth of 6.4% during

1995-96. Agriculture, the largest contributing

sector, showed a negligible growth of 0.7% as

against 5.3 % in the preceding year. The growth

of the manufacturing sector was 1.8% compared

with 4.4% during the last year. The large scale

manufacturing registered a decline of 1.4%.

Heavy taxation, high prices of raw materials,

escalating cost of loans and high utility charges

were the main reasons which impeded the growth

of the Industrial sector.

Despite the imposition of additional taxes of Rs.

40.8 billion in the Budget 1996-97 and a further

Rs.13.0 billion through another tax package

announced in October 1996, the fiscal deficit

widened to 6.2% of GDP as against the budgeted

target of 4.0%. Inflation during the year increased

to 11.6%. The rupee devalued by 15%, utility

tariffs increased by 6.25% and revision in sales

tax from 15% to 18% increased the cost of

production. The high deficit financing at 6.3%

had corresponding inflationary impact of 11.6%.

As a result, the balance of payment came under

pressure during the year. The exports decreased

by 5.4%, imports decreased by 1.47% and the

trade deficit increased to US $ 3.37 billion.

THE GROUP PERFORMANCE

The Atlas Group, of which your company is a

constituent member, relies on intellectual capital.

Harmonizing human capital, owners capital and

market capital-the Group image at the

Government, business and international levels

remaining within the bounds of law, morality and

good practices-is our entrepreneurial brand equity.

The Atlas Group is a diversified group dealing in

engineering, financial services, trading, office

equipments and information technology. It

consists of seven public limited companies quoted

on the stock exchanges in Pakistan and six

private limited companies (vide annexure). Atlas

shareholders equity has grown to Rs. 2 billion

over the years; assets have increased to over

Rs. 8 billion; personnel strength is over 2500 and

sales have crossed the Rs. 8 billion mark. The

group paid taxes of Rs. 2.40 billion being 30%

of the total turnover and your Company's share

of Rs. 1.24 billion being 35.51% of the company's

total sales, not a small amount by any standard

for an industry providing for the common man's

means of transportation.

The total paid up capital of the seven listed

companies stood at Rs. 855 million and free

reserves and surplus at Rs. 903 million. The total

equity in listed companies stood at Rs. 1,758

million by 1997. The net worth value per Rs. 10/-

worked out to Rs. 20.56. Out of these seven

companies, two companies have been rated 'A+'

and three 'A' by the credit rating and other

evaluating agencies. Your company is rated 'A+'.

Your company ranked 39th in overall performance

among 577 industrial companies (total 782

companies) listed on the Karachi Stock Exchange.

In sales the ranking stood at 28th:

The seven companies, set up at different times-

the earliest in 1963 with a paid up capital of

Rs. 2.00 million and the latest in 1993 with a

paid up capital of Rs. 400.00 million - have paid

cash dividend of Rs. 244.28 million and bonus

of Rs. 166.55 million (market value Rs, 404.43

million) against the paid up capital of Rs. 855.15

million.

Your Company was set up in 1963 with a paid

up capital of Rs. 2.00 million which has grown

to Rs. 132.707 million. The total equity at Rs.

392.570 million include reserves and the

unappropriated profit of Rs. 259.863 million.

During this period the Company issued bonus

shares of Rs. 79.857 million (market value Rs.

255.542 million at Rs. 32.00 per share) and paid

cash dividend of Rs. 112.582 million against the

shareholders' investment of Rs. 106.240 million.

HONDA 100 MILLION ACHIEVEMENT / THE

MOTORCYCLE INDUSTRY

On 13th October '97 the 100 million motorcycle

rolled out at Honda's Kumamoto factory in Japan.

This is a world record. Honda Motorcycles have

the largest population in the world and continues

to be the No.1 motorcycle in all respects, in

market share with a complete back up of after

sales, service and supply of parts. Together with

the automobiles and the power products Honda

achieved a record sale of US $ 42,653.521

million and profit before tax of US $ 3,305.496

million, with profitability ranking of 5th among the

top automobile manufacturers of the world.

Atlas Group has the privilege to represent the

complete range of Honda products-motorcycles,

automobiles and the power products. In Pakistan,

the first motorcycle rolled out in March 1965 and

now has the largest population of motorcycles-

the Honda brand total in Pakistan is 931,000

out of a total estimated 1,550,000 motorcycles.

It has continued to be No.1 - now enjoying 61%

market share in Pakistan and second only to

Brazilian Honda's market share of 80%.

The Motorcycle Industry went through a mixed

experience during the year under review. There

was a devaluation of 8.5% in October 1996, then

a bad cotton crop and political uncertainty in the

2nd quarter which all had a considerable adverse

impact on the market. With the establishment of

the new Government speculation about

downward revision of duties and taxes mounted

until the end of the 3rd quarter and seriously

affected the sales. The economic relief package

was announced on 28th March 1997 resulting

in a sales tax reduction from18% to12.5%. The

Industry responded quickly and reduced prices

by Rs. 2500 to Rs. 3300 per unit of motorcycles

depending on the different categories of

motorcycles and brands. This went a long way

to help rejuvenate the Industry.

In addition to the other two Japanese brands

there are two Chinese brands with a 30% lower

price also competing in the market. Your

Company focussed on product quality,

improvement in dealership network and after

sales service including spare parts sale. Our

main competitive advantage remains the largest

production capacity at two locations-Karachi

and Sheikhupura, in addition to the wide net-

work of after sales service and abundant supply

of spare parts.

During the year, your Company introduced

minor changes for improvement in both the

CD70 and CG125 models and formulated an

appropriate and effective pricing strategy to

contain competition which met with great

success-so much so that the CG 125 showed a

growth of 25% over the preceding year.

Though market size remained similar to the

previous year-l13,000unitsbutyourCompany

posted higher sales of 67,579 units up from

64,879 units during the previous year. In the

process your Company improved its market share

to 61%-up from 58% of the preceding year.

THE COMPANY'S RESULTS

The Company's sales for the year ended 30

June 1997wasarecord Rs. 3.498 billion against

Rs. 3.092 billion in 1995-96 showing a growth of

13.13%. The Profit before tax was also an all

time high at Rs.188.596 million against the

preceding year's profit of Rs. 176.077 million.

The Gross Profit ratio for the year stood at 11.34%

against 10.94% of the preceding year as a result

of a strict control of costs.

These increases were made possible by the

Company's efficient and effective management

achieving economy in costs, together with a

comparatively favourable Dollar-Yen exchange

rate and a higher volume. Marketing expenses

increased from Rs.71.717 million in 1995-96 to

Rs. 92.596 million this year in line with

management efforts to meet new competition

and gain market share. Cash and Inventory were

quite effectively managed, financial expenses

for the year under review were controlled at Rs.

35.451 million, net of investment income of Rs.

6.862 million earned during the year. Your

Company achieved an ROE of 31.82% and EPS

of Rs.9.42 after tax.

The equity of the company at Rs. 392.570 million

including reserves amounting to Rs. 259.863

million reflects the sound financial position of the

Company.

Export activities are a matter of priority with the

Company. In order to meet competition from

other brands in Bangladesh and Nepal, after

sales service backup was provided by personal

visits of our service engineers. Visits for export

to Sri Lanka were also undertaken. We are aiming

at other territories such as Middle East and

Central Asian States. Price competition is one

major element in these markets which is being

analysed for effective action.

DELETION - GEAR PROJECT

Your Company has a policy of pursuing

indigenization of components in order to reduce

reliance on imports, minimising exchange rate

fluctuations for ultimate price stabilization and

broad-basing technology. Your Company has

already done much in this respect. Currently it

is focussed on developing joint ventures and

technical ties between local parts manufacturers

with their Japanese counterparts. Some of these

technical assistance agreements between

Japanese and Pakistani vendors have been

arranged and others are in the process.

For in-house manufacturing, your Company has

undertaken the deletion of gear sets with a

substantial investment of Rs. 210.00 million.

Honda Trading Corporation has provided

suppliers credit on the total machinery and

equipment which has been imported at a cost of

Rs. 110.00 million. Financing of the balance of

the cost has been arranged locally. Honda Motor

Company Japan has played a pivotal role in this

project by extending full cooperation, guidance

and help in terms of planning, arranging finances

and technical support.

Civil works have been completed. Machinery has

been installed and is being tested and trial runs

for production will be undertaken immediately

thereafter. The project will be in full production

during the current fiscal year.

The deletion of the balance parts which involve

higher technologies, will be highly capital

intensive. Nevertheless, your management is

dedicated to achieving more and more deletion

and to exceed the Government fixed percentage

of 85% by the year 2001. This will involve heavy

in-house investment and by the vendors and

additional joint ventures and technical assistance

for each and every part, which we are determined

to undertake and support.

HUMAN RESOURCE

Investment in people and human resource

development in the Atlas Group is a continuous

and self sustaining process. We send people for

higher education and training to such institutions

as Harvard Business School, Stanford, Wharton

School of Finance and Economics, INSEAD,

Claremont, IMD, Notre Dame, Eton College, IBA,

LUMS and PIM. All the members of our senior

management team have had exposure to these

institutions. Others have had exposure to various

other institutions related to their field of interest

and technology in and outside the country.

The Group manpower includes 152 employees

with service of over 25 years, 232 with over 20

years, 575 with over 15 years and 753 with over

10 years service. Among them,153 are post

graduates, 493 graduates and the rest diploma

holders, intermediates, matriculates and skilled

workers. Group employees turnover is around

5%. Your Company's manpower was 814

employees as on June 30, 1997. Presently, the

staff include 39 post-graduates and 88 graduates

among other skilled and semi-skilled persons.

Following the management policy on local and

foreign training of key executives, Mr. Aamir H.

Shirazi CEO will be completing this year a

Management Development Course-OPM-three

weeks every year for three years, at Harvard

Business School. Mr. Nurul Hoda, General

Manager Marketing attended a marketing