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LEVER BROTHERS PAKISTAN LIMITED

ANNUAL REPORT 1997

Lever Brothers Pakistan Limited

Report and Accounts

July 1996 - June 1997

Contents

Company Information

Board of Directors

Mr. Iain Strachen Sangster

(Chairman & Chief Executive)

Mr. Mashkoor Alam

(Vice Chairman)

Mr. Syed Babar Ali

Mr. Fatehali W. Vellani

Mr. Irtiza Husain

Dr. Aruna Dias Bandaranayake

Major (Retd.) Iqbal Ahmad

Mr. Razi ur Rahman Khan

Mr. Mukhtar Ahmed Aziz

Mr. Omar H. Karim

Company Secretary

Mr. Aamer Aziz Saiyid

Auditors

Messrs. A. F. Ferguson & Co.

State Life Building No. 1-C,

I.I. Chundrigar Road,

Karachi.

Registered Office

Avari Plaza

Miss Fatima Jinnah Road,

Karachi.

Share Registration Office

c/o Ferguson Associates (Pvt.) Ltd.

State Life Building No. l-A,

I.I. Chundrigar Road,

Karachi.

Notice of Annual General Meeting

Notice is hereby given that the 49th Annual General Meeting of Lever Brothers Pakistan

Limited will be held at Khorshed Mahal, Avari Towers Hotel, Miss Fatima Jinnah Road,

Karachi, on Tuesday, October 14, 1997 at 11.00 a.m. to transact the following business:

Ordinary Business

1. To receive and consider the Company's Accounts for the year ended 30 June 1997,

together with the Reports of the Auditors and Directors.

2. To declare the final dividend on the ordinary shares of the Company.

(The Directors have recommended a final dividend of 50%, i.e. Rs. 25 per ordinary

share issued, in addition to the interim dividend already paid @ 30% or Rs. 15 on

LBPL shares and 35% or Rs. 3.50 on BBPL shares).

3. To appoint Auditors for the ensuing year, and to fix their remuneration.

(Messrs A.F. Ferguson & Co., Chartered Accountants, retire, and being eligible, have

offered themselves for re-appointment).

Special Business (Statement attached).

4. To approve the remuneration of Executive Directors including the Chief Executive.

5. To approve reduction of the number of Board seats from 12 to 10, as decided by

the Board of Directors.

Any other business, with the permission of the Chair.

Notes:

1. Share Transfer Books will be closed from 7 to 14 October 1996 (both days inclusive).

2. All Members (whether holding Preference or Ordinary Shares) are entitled to attend

and vote at the Meeting. A Member may appoint a proxy who need not be a Member

of the Company.

3. The instrument appointing the proxy (form attached) and (if applicable) the Power of

Attorney or other authority under which it is signed, or a notarially certified copy

thereof, must be lodged at the Company's Registered Office not later than 48 hours

before the time of the Meeting.

4. Any change of address should be notified immediately to the Company's Share Registrars.

Statement in respect of Special Business

and related Draft Resolutions

Material facts concerning the Special Business to be transacted at the Annual General Meeting

and the proposed Resolutions related thereto are given below.

Item 4 of Agenda - Remuneration of Executive Directors

According to law, it is necessary to obtain Shareholders' approval for the holding of office of

profit by any of the Directors as well as of their remuneration. It is therefore proposed to pass

the following as an Ordinary Resolution

Resolved that approval is hereby granted for the holding of office of profit with the Company

by the Executive Directors including the Chief Executive, and for the payment of remuneration

to them for their respective periods of service in accordance with their individual contracts

and the rules of the Company, amounting in the aggregate to Rs. 24.3 million actuals for the

period July 1996 to June 1997 (including the Brooke Bond Directors) and Rs. 18.5 million estimated

for July 1997 to June 1998.

(The incumbent Executive Directors, Mr. I.S. Sangster, Mr. Mashkoor Alam and Dr. A.D.

Bandaranayake, are interested to the extent of the remuneration payable to them individually,

and all the outgoing Executive Directors were likewise interested upto the dates they served

on the Board).

Item 7 of the Agenda - Reduction in number of Board seats

Consequent upon the merger of Brooke Bond Pakistan Limited with Lever Brothers, the Board

of Directors was reconstituted, as a result of which the Board now comprises 10 Directors. It

is not proposed to increase this number for the time being.

The number of Board seats was previously fixed by the Board at 12 and it is now recommended

that the number be reduced to 10. For this purpose, it is proposed to pass the following

Special Resolution.

Resolved that consequent upon the reconstitution of the Board after the merger of Brooke

Bond with Lever Brothers, the number of Directors, previously fixed by the Board at 12, is

hereby reduced to 10, and shall remain so fixed until altered by the Board.

Report of the Directors

The Directors have pleasure in presenting their Annual Report together with the Company's audited

accounts for the year ended June 30, 1997.

Results and Dividends

July 1996

Jan. 1995

Jun-97

- June 96

(12 months)

(18 months)

(Rupees in thousand)

Profit after taxation

556,564

1,046,459

Unappropriated profit

257,099

233,348

--------------

813,663

1,279,807

Appropriations:

Transfer to General Reserve

27,000

Dividends:

On 5% Cumulative Preference Shares

239

on LBPL Shares

On Ordinary Shares

- First Interim of Rs. 15 already paid (1996: Rs.10) on LBPL Shares

149,827

99,885

- First Interim of Rs. 3.50 already paid (1996: Rs. 2) on BB Shares

41,835

23,906

- Second Interim Nil (1996: Rs. 10) paid on LBPL Shares

99,885

- Second Interim Nil (1996: Rs. 8.50) paid on BB Shares

101,599

- Third Interim Nil (1996: Rs. 2) paid on BB Shares

23,906

- Final of Rs. 25 now proposed (1996: Rs. 30 LBPL and Rs. 29 BB)

319,206

646,288

--------------

511,107

1,022,708

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Unappropriated profit carried forward

302,556

257,099

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In spite of a return to a difficult economic and trading environment we are pleased to report on the first

year for the merged business net earnings of Rs. 557 million.

Smuggling especially in Tea and Toilet Soaps, increased dramatically during the current year thus

adversely affecting our business. The resulting reduction in volume has led to a decrease of 22%

in annualised profit before tax compared to the equivalent previous period. As expected, the Ice

Cream business incurred losses in its second year of operation, but the underlying trend shows steady

improvement and is in line with plan.

Timely measures taken by your Company to reduce the working capital resulted in a healthy improvement

in cash flow of Rs. 478 million, and a reduction of Rs. 25 million in interest payments, compared to the

annualised previous year.

The Directors propose a final dividend of Rs. 25 per share (50%). Interim dividend already paid by Lever

Brothers Pakistan Limited is Rs. 15 per share (30%) and Brooke Bond Pakistan Limited of Rs. 3.5 per

share (35%). Brooke Bond Pakistan Limited's interim dividend equalised on the basis of swap ratio is

30% based on the revised share holding.

Amalgamation

Your Board is pleased to report that the order sanctioning the Scheme of Arrangement for the amalgamation

of Brooke Bond Pakistan Limited with the Company was passed by the High Court of Sindh on 16 May

1997. The Court Order was filed with the Registrar of Companies, Karachi on 19 May 1997, in order to

put the Scheme of Arrangement into effect.

The Board of Directors of your Company have, subsequent to the Balance Sheet date, allotted to the members

of Brooke Bond Pakistan Limited one ordinary share of Rs. 50 of the Company for every 4.3 ordinary

shares of Rs. 10 each held by them in Brooke Bond Pakistan Limited in accordance with aforesaid Scheme

of Arrangement.

All figures set out in this report and the audited accounts include those relating to the activities of the

former Brooke Bond Pakistan Limited. Figures for 1996 have been re-stated to include those of Brooke

Bond Pakistan Limited in order-to facilitate meaningful comparison. However, the figures for the year

1996 relate to an 18 month period whereas those of the current year cover 12 months.

Expansion and Finance

The Company has financed in the year capital expenditure of Rs. 186 million from its strong cash flow

stream. This expenditure includes further ice cream expansion (mainly cold chain distribution), and general

modernisation and replacement of old plant at all our facilities.

Although the Company is confident of the future potential of the market, the current uncertain and

disappointing economic environment forces it to be cautious with its investment and capacity enhancement.

Expansion costs will be financed through retained earnings as well as fresh lines of credit. The Company

continues to pursue its policy on local sourcing, wherever commercially feasible.

Smuggling of Products

The current year has seen a dramatic increase in the quantity of smuggled products available in the market.

Levels reached far exceed those attained in 1993-94 and a conservative estimate of the present rate of

smuggled tea for example is in excess of 60,000 tons per annum. The increase in smuggling of toilet soap

has also impacted negatively on the sale of local company products.

The primary reason for the dramatic increase in smuggling was the substantial increase in import duty

rates and introduction of sales tax on selling prices that took place in 1996. The increased product selling

prices necessary to recover the raised tax burden resulted in a substantial cash advantage in favour of

the smuggler. At one stage the total tax burden on tea reached 109% of import price of tea.

Your Company has been in constant dialogue with the Government in efforts to reduce the levels of taxation

thereby encouraging increased sales of local production and enhanced Government revenue. The intro-

duction of such measures earlier in 1997 enabled the Company to reduce the prices of its soap products

and as a result sales have turned to normal levels and smuggling declined substantially. Todate however'

the Government has not reduced duty levels on tea sufficient to enable the Company to react similarly.

The decline in tea sales affecting both Lipton and Brooke Bond products portfolios is of serious concern

to your Board.

Detergents and Personal Products

As already commented upon the results for this sector have been adversely affected by the substantial

increase in availability of smuggled products. The reduction in prices however that the Company introduced

in April has had a dramatic favourable impact on volumes since and it is expected that this sector will

now return to a pattern of continued profitable growth in future years. The personal products portfolio

is expanding and is contributing to profit growth in this sector.

Foods

Trading performance in Foods has not been uniform across its product groups. There has been a reduction

of 1.2% in sales, and a significant reduction in operating profit of 35% over annualised previous year.

The tea business witnessed a drastic increase in cross border smuggling resulting in a significant decrease

in our Tea sales. Unless and until there is a further significant drop in duty our tea business performance

will fall well short of previous levels.

Innovative internal restructuring of our oils and fats business enabled us to control our costs much more

efficiently than before. As a result operating profit improved over the previous year and there has been

a turn around of the business. Further consolidation of this improvement is required to ensure the long

term future.

Ice Cream is still in its development stage. Distribution of Walls Ice Cream has been further extended

geographically. The underlying trends show that there is continuous improvement in line with our original

forecasts and the business is expected to generate profits in the coming years.

Prospects

The Company continues to pursue its programme of innovation and improvement of its products and

its service to its customers.

The commitment to the productive use of modern information technology has been extended to the most

modern techniques of data communication and open systems. This will result in improvement in efficiency

and cost reduction.

Staff Relations

The Company continues to benefit from the efforts and dedication of all employees. The Directors are

once more pleased to record their appreciation. Development of management and staff has a high priority

in the Company.

Directors

Since the last Report, the following changes have taken place in the Board of Directors.

Major (Retd.) Iqbal Ahmad replaced Mr. Taimur Azmat Osman as nominee of the Punjab Government.

Mr. Raziur Rahman Khan was appointed as nominee of National Investment Trust Ltd. in place of Mr.

M. Asadullah Sheikh.

Mr. Mukhtar Ahmed Aziz replaced Mr. Abdul Ghani Bachani as nominee of the Sindh Government.

Messrs Mujib ur Rahman, P.H. Khan, J.A. Lea, C.D. Welland and S.N. Patel, all Unilever nominees, resigned

to allow reconstitution of the Board after the merger with Brooke Bond. :

Messrs Mashkoor Alam, Irtiza Husain and Omar H. Karim, Directors of former Brooke Bond, were co-

opted to the Board. Mr. Mashkoor Alam was also elected as Vice Chairman.

The Board wishes to place on record its appreciation of the valuable services rendered to the Company

by all the outgoing Directors during their respective tenures.

The term of office of the present Directors will expire on 26 May 1999.

Holding Company

Through its wholly-owned U.K. subsidiary, Unilever Overseas Holdings, U.K. Unilever PLC, a company

incorporated in the United Kingdom, is the ultimate holding company of Lever Brothers Pakistan Limited.

Auditors

The Auditors, Messrs. A.F. Ferguson & Co., Chartered Accountants, retire at the conclusion of the meeting.

Being eligible, they have offered themselves for re-appointment.

TEA

In Pakistan Tea is more than just a beverage; it is part of traditional hospitality in most of

our homes. Over the years Brooke Bond & Lipton have built formidable grand equities,

having delighted Pakistani consumers by offering blends that catered to their taste and

preference.

Local Tea Sales and profitability have been under pressure from continued smuggling of Tea since

1994. This has severely impacted the business of legitimate tea traders and blenders, and caused

substantial losses of much needed revenues to the Government. It is estimated by the Pakistan

Tea Association that approximately 60 million kilograms tea (over 40% of the total Pakistan

consumption) will enter Pakistan through the illegal channel. Over a 12 month period several

representations have been made to the Government to curb the smuggling of tea but no effective

measures have been taken to date.

The Company is focusing on fulfilling a variety of consumer needs and a string of innovative

products are in the development stage to safeguard Lever's market share and offer better value

to consumers.

Lever Brothers is also working towards improving its cost competitiveness by taking advantage

of the synergies from the recent amalgamation of the two companies, through improving

its operational and supply chain efficiencies and strengthening its distribution.

The Company is also committed to accelerate its tea research project in Mansehra, aimed at

growing tea in Pakistan.

ICE CREAM

As part of its commitment to invest, LBPL brought Wall's Ice Cream to Pakistan in

1995. The instant success of Wall's and clear consumer preference for the Brand

proved the willingness of the Pakistani market to support high quality, hygienic,

innovative products. In keeping with strategy, Wall's launched five new products at the

start of the 1997 Ice Cream season, namely Cornetto Mango, Feast Kulfa, Split Strawberry, ~

Mini Milk Samar and Solo Cola. These products have not only fuelled volume growth but

also helped in maintaining and stimulating consumer interest. Moreover, the drive for

volume growth continued through geographical expansion with the addition of new

concessionaires and satellite towns.

Our focused business strategy will help us in having a stronger market position in ice

cream in Pakistan and our continued focus on innovation and an aggressive cabinet policy

will actually help in growing the ice cream market as a whole, which is essential for the

long term health of the business and in realising the full potential of our investment.

EDIBLE OILS FATS

Edible Oils & Fats Business comprises of a range of superior quality brands in Banaspati,

Cooking Oils, Margarine and specialized fats/oils for the Bakery/Food industry. Dalda,

Blue Band and Planta are not only the market leaders in their respective segments

but are also helping consumers in improving their quality of life by offering superior taste, health

and nutrition.

Profitable volume growth has been achieved during 96/97 through a focused business approach,

reduction in costs by improving efficiencies and controlling wastages; and an improvement in

product quality through increased innovation.

Dalda Banaspati, the brand which established the Banaspati category in Pakistan, was successfully

re-launched with improved taste and healthier formulation. Clear bottles for Dalda Cooking Oil,

one litre tins and one litre pouch packs for Dalda Banaspati, were also introduced to meet the

requirement of a broader segment of consumers.

The Dalda Advisory Service (a specialist service to help the consumers in improving their cooking

skills, menu planning and household management) was expanded and improved with a weekly

1/2 hour TV programme, introduction of Urdu & English Dalda Cook Books, and Dalda Video

cassettes. In addition, regular cooking classes were held and assistance given to house-wives

through a write in and phone- in service.

Our revised business strategy greatly helped in improving profits and market shares. The Edible

Oils and Fats Business is now well set to achieve even better results by excelling in meeting

consumers needs.

PERSONAL WASH & PERSONAL CARE

The Company further improved its dominance in the Personal Wash market. All the brands

delivered their respective consumer promises. Profitable growth was registered in all

brands resulting in further improvement in market share, particularly Lux, Rexona and

Lifebuoy. Second half of the year, however, showed a major impact of "Grey Soaps" adversely

affecting our business. A combined approach by government reducing duties and taxes and a

Company focus on costs, led to a price decrease on Personal Wash brands later in the financial

year, resulting in positive volume recovery.

To further build on Lifebuoy equity, a superior quality Lifebuoy Gold was successfully extended

nationally. A new proposition, Liril, has also been introduced to capitalise the freshness opportunity.

In Rexona, an Olive variant has been launched. All of the new introductions have registered

positive consumer responses.

The Personal Products business showed aggressive growth, specially in Skin and Hair Care

categories. Both Fair & Lovely and Sunsilk Shampoo gained market share despite pressure from

competition.

Price reduction, implemented in the first half of 1997, was one of the key events of this year. The

reduction in tariffs announced by the Government in April 1997 allowed us to reduce prices for

the entire Personal Products range. We expect that passing this benefit on to the consumers will

further boost growth of our business.

A number of development products are expected to culminate in the second half of 1997 and will

add more value to the business.

FABRIC WASH & HOME CARE

Fabrics and Home Care business, for the major part of the year, faced mixed

fortunes, the fabric business registering strong growth and market share. The Home

Care business on the other hand remained volatile. The entire business came

under tremendous pressure towards the last quarter of the financial year on account of ~~

increased competition and depressed economic activity.

The Company in May 1997 reduced prices on its entire Fabric and Home Care Brands

portfolio. following a duty reduction announcement by the Government.

During the year the Company launched Power Surf and Wheel Washing Powder, two

additional major brands to its laundry care portfolio. Power Surf was the first locally

produced enzymatic powder whereas Wheel gave the Company an entry into the mass

market, targeting laundry soap users.

The Detergents business, with its track record of research and innovation and its

superlative product quality, will continue to excel in these areas. The identified areas are

regarded as the most important strategic elements in the long term health of Company's

detergents business.

Accounts

LEVER BROTHERS PAKISTAN LIMITED

Auditors' Report to the Members

We have audited the annexed balance sheet of Lever Brothers Pakistan Limited as at June

30, 1997 and the related profit and loss account and cash flow statement, 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;

given to us, the balance sheet, profit and loss account and the cash flow statement,

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 June 30, 1997 and of the profit and cash

flows 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.

Balance Sheet

as at June 30, 1997

Note

1997

1996

(Rupees in thousand)

Share Capital and Reserves

Share capital

643,195

623,737

Reserves

322,396

335,583

Unappropriated profit

302,556

257,099

1,268,147

1,216,419

Surplus on Revaluation of Fixed Assets

119,957

126,228

Redeemable Capital

220,000

294,666

Liabilities Against Assets Subject To

Finance Lease

6,511

Deferred Liabilities

Deferred taxation

65,752

67,490

Staff retirement benefits

274,295

251,184

Current Liabilities

Current maturity of redeemable capital

223,333

167,334

Current maturity of liabililty against assets

subject to finance lease

1,523

Short-term loan

416,150

178,250

Finance under mark-up arrangements

60,093

460,054

Creditors, accrued and other liabilities

2,653,284

2,450,492

Dividends

334,180

658,711

3,688,563

3,914,841

Commitments

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