NATCO PHARMA LTD a Complete Pharma Company

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TWENTIETH ANNUAL REPORT

2002-2003

NATCO ^ > NATCO PHARMA LTD A Complete Pharma Company

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NATCO PHARMA LIMITED

BOARD OF DIRECTORS

Sri V.C. Nannapaneni Chairman & Managing Director

Dr K.U. Mada Director

Sri R. Monani Director

Sri G.S. Murthy Director

Sri jahar Bhowmik Director - IDBI Nominee

Dr B.S. Bajaj Director

Smt Durga Devi Nannapaneni Whole Time Director

Dr P. Khadgapathi Director & Executive Vice President (Tech.)

Dr M. Rami Reddy Director

P Bhaskara Narayana Bankers Executive Vice President Allahabad Bank (Corporate Finance) State Bank of India State Bank of Travancore M Adinarayana Corporation Bank Company Secretary & Canara Bank CM (Corporate Affairs) Oriental Bank of Commerce

Auditors Registered Office M/s. Brahmayya & Co NATCO House Chartered Accountants Road No.2, Banjara Hills 403 & 404, Golden Green Apts. Hyderabad 500 033 Irrum Manzil Colony Tel. (040) 23547532; Fax No : (040) 23548243 Hyderabad - 500 085. Email : [email protected]

PLANT LOCATIONS

Pharma Division Pharma Division - Parenterals Kothur Post & Mandal Vijayapuri North, Nagarjuna Sagar Mahaboobnagar Dist Nalgonda Dist Andhra Pradesh - 509 228 Andhra Pradesh - 508 202

Chemical Division Chemical - R & D Division Mekaguda, Kothur Mandal B-13, Industrial Estate Mahaboobnagar Dist Sanathnagar, Hyderabad Andhra Pradesh - 509 228 Andhra Pradesh - 500 018

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NATCO PHARMA LIMITED

NOTICE Notice is hereby given that the TWENTIETH Annual General Meeting of the Members of the Company will be held on Tuesday, the 30th day of September, 2003 at 10.30 a.m. at The Hyderabad Gymkhana, Road No.2, Banjara Hills, Hyderabad - 500 034, to transact the following business: ORDINARY BUSINESS 1. To receive, consider and adopt the Audited Accounts of the Company for the year ended 31st March 2003, together with the Report of the Directors and the Auditors thereon. 2. To elect a Director in place of Dr.K.U.Mada, who retires by rotation and being eligible, offers himself for re-appointment. 3. To elect a Director in place of Dr.P.Khadgapathi, who retires by rotation and being eligible, offers himself for re-appointment. 4. To appoint Auditors for the current year and fix their remuneration. M/s.Brahmayya & Co., Chartered Accountants, Hyderabad, the retiring Auditors are eligible for re-appointment. SPECIAL BUSINESS 5. To consider and if thought fit, to pass with or without modification(s), the following resolution as Special Resolution: "RESOLVED THAT Dr.P.Khadgapathi, Director & Executive Vice President (Tech.) of the Company for the remaining period of his term of office be paid a salary of Rs.45,000(Rupees forty five thousand only) per month w.e.f. 1-4-2003, the other terms ana conditions remaining same as approved by the members at their Extraordinary General Meeting held on 8-7-2000." 6. To consider and if thought fit, to pass with or without modification(s), the following resolution' as Special Resolution: "RESOLVED THAT pursuant to sub section (1) of Section 163 of the Companies Act, 1956, the Company hereby approves that the records relating to Registers and the Index of members will be kept at M/s Venture Capital and Corporate Investments Ltd., 3rd Floor, Progressive Towers, 6-2-913/914, Khairatabad, Hyderabad - 500 004, instead of the Registered Office of the Company. RESOLVED FURTHER THAT the Registers and Index of members of the Company required to be maintained and kept open for inspection under the provisions of Companies Act, 1956, be kept open for such inspection at the place where they are kept, by the persons entitled thereto to the extent and in the manner and on payment of fees, if any, specified in the Act on any working day of the Company except when the Registers and Books are closed, under the provisions of the Companies Act, 1956, or the Articles of Association of the Company." By order of the Board for NATCO PHARMA LIMITED

Place : Hyderabad M. ADINARAYANA Date : 31-7-2003 ' COMPANY SECRETARY & CM (CORPORATE AFFAIRS) NOTES 1. Explanatory Statement pursuant to Section 173(2) of the Companies Act, 1956 in respect of the Special Business is annexed hereto. 2. A member entitled to attend and vote at the meeting is entitled to 'appoint a proxy to attend "and vote instead of himself/ herself on a poll and a proxy need not be a member of the Company. The instrument of proxy in order to be valid, must be deposited at the Registered Office or the Company duly completed and signed, at least 48 hours before the commencement of the meeting.

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3. Members holding shares in physical form are requested to notify any change in their address immediately to the Registered Office of the Company, and in case of Members holding shares in Electronic form are requested to notify any change in mailing address to their respective Depository Participants. 4. The Members / Proxies are requested to bring the copy of the Annual Report to the Annual General Meeting and hand over the attendance slip at the entrance of the meeting along with their Registered Folio No. / Client ID and DP ID Numbers for easy identification. 5. Nomination facility is available as per the guidelines. Share transfers and related matters-will be undertaken at the Company's Transfer Agents M/s.Venture Capital and Corporate Investments Limited. Members as per their convenience they can as well correspond with the Share Transfer Agents of the Company or Legal & Secretarial Dept. of the Company at Regd. Office of the Company. 6. The Register of Members and Share Transfer Books will remain closed for two days i.e. on Monday, the 29th day of September 2003 and Tuesday, the 30th day of September, 2003 (both days). 7. Information relating to the Directors seeking re-appointment:

Name of the Qualifications Experience Directorship(s) Membership(s) Director in other Companies in Committees of other Companies Board

Dr.K.U.Mada Post He is an eminent economist, 1* Lupin Limited 10 Graduate in development banker and 2. Southern Petrochemical M.A(Economics) Company Director. He holds MA. Industries Ltd. and a Doctorate and Ph.D. degrees in Economics 3. Ispat Metallics in Economics from the University of Bombay. India Ltd. He also obtained a certificate in 4. Hotel Leelaventure Ltd. financial management. He taught 5. Asian Electronics Ltd. Economics at Jai Hind College, 6. National Securities Mumbai for 6 years. He worked Depository Ltd. as an Executive in IDBI in all its - Member, departments and was Executive Executive Committee Director in IDBI for over three years. He has written books and also published articles. Dr.Mada represented IDBI as Speaker / participant at several national and international conferences / seminars on economic, corporate and institutional affairs. He was Chairman / Member of a number of committees constituted by IDBI / other financial institutions and Government of India. Dr. Mada has been Chairman / Director / nominee director of public companies for over 27 years.

Dr.P. Khadgapathi M.Pharm and a He worked in M/s. IDPL for about Natco Genomik Pvt. Ltd. NIL Doctorate in the 7 years. He has pioneered the same discipline research in some of the new Drug Delivery Systems by using latest analytical techniques.

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NATCO PHARMA LIMITED

EXPLANATORY STATEMENT AS REQUIRED UNDER SECTION 173(2) OF THE COMPANIES ACT, 1956 Item No.5: Members at their Extraordinary General Meeting held on 08-07-2000 appointed Dr.P.Khadgapathi as Director & Executive Vice President (Tech.) w.e.f.31-01-2000 for a period of 5 years. Dr.P.Khadgapathi is now looking after all the technical matters relating to Nagarjuna Sagar and Kothur divisions and he is overall incharge of those two units in addition to looking after new drug delivery techniques as also new products. In view of his contribution to the Company it is how proposed to increase his salary from Rs.38,980/-(Rupees thirty eight thousand nine hundred and eighty only) per month to Rs.45,000/-(Rupees forty five thousand only) per month w.e.f. 1-4-2003 for the remaining period of his term of office and the other terms and conditions remaining the same as approved by the members on 8-7-2000. The Board of Directors recommend passing the special resolution and none of the Directors, except Dr.P.Khadgapathi is concerned or interested in the said Resolution. Item No.6: SEBI vide its Circular No. D&CC/FTTC/CIR/15/2002 dated 27-12-2002 made it mandatory for all the Companies to have a Common Share Transfer Agency to do both Physical and Electronic Share registry work at one place to avoid delay in dematerialisation of shares. Companies had been given time up to 31st March, 2003 to implement the same. Accordingly the Board of Directors of the Company had appointed M/s. Venture Capital and Corporate Investments Ltd. as the Common Share Transfer Agency. Hence the Registers, Indexes etc of the Company which are required to be maintained at the Registered Office of the Company, shall now be kept and can be inspected at the M/s. Venture Capital and Corporate Investments Ltd. for which approval of the members is required to be obtained by way of Special Resolution. None of the Directors of the Company is in any way are concerned or interested, in the resolution. Your Directors recommend the resolution for your approval.

By order of the Board for NATCO PHARMA LIMITED

Place : Hyderabad M. ADINARAYANA Date : 31-7-2003 ' COMPANY SECRETARY & CM (CORPORATE AFFAIRS)

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DIRECTORS' REPORT To the Members Your Directors have pleasure in presenting the 20th Annual Report together with the audited accounts of the Company for the year ended on 31st March, 2003. Operational Performance During the year under review, the Company's revenues at Rs. 119.86 crores, grew at 26% as compared to Rs. 95.20 crores for the year ended on 31st March, 2002. The bulk chemicals division recorded an impressive growth of 52% over the last year, clocking a gross revenue of Rs. 61.83 crores as against Rs. 40.73 crores for the last year. The finished dosage formulations and contract manufacturing business has also recorded a growth of 25% over that of the previous year, the gross revenues of the division being Rs. 47.78 crores as compared to Rs. 38.31 crores during the last year. The branded generics segment, into which the Company had made a modest entry during the current year, could record a revenue of a little over Rs. 8 crores during the year. The Company earned a gross surplus of Rs. 1148 lakhs (previous year Rs. 1109 lakhs (after taking credit for interest waivers etc. amounting to Rs. 244 lakhs (previous year : Rs. 709 lakhs). After writing off expired export incentives of Rs. 437 lakhs, (previous year : Rs. 355 lakhs) bad debts Rs. 177 lakhs (previous year Rs. 642 lakhs) and after providing for a Minimum Alternate Tax of Rs. 19 lakhs, (previous year Rs. 4 lakhs) the year ended with a net surplus of Rs. 515 lakhs (previous year Rs. 107 lakhs). As of 31st March, 2003, the Company has been able to wipe out all its accumulated losses. The performance for 2002-2003 is summarized below: " Rs. in lakhs 2002-2003 2001-2002 Revenue from Bulk Chemicals division 6183 4073 Revenue from Formulations division 3581 2863 Revenue from Contract Manufacturing 1197 968 Other Income (including interest waivers of Rs. 244 lakhs during 2002-2003 as against • Rs. 709 lakhs during 2001-2002) 1025 1616 TOTAL 11986 9520 Surplus available after meeting expenses 1148 ,1108 Less : Bad debts and expired export incentives written off 614 997 Gross surplus available 534 111 Provision for Minimum Alternate Tax 19 4 Profit after tax 515 107

The Company has accounted for a deferred tax liability of Rs. 270 lakhs during the year (as against Rs. 61 lakhs during the last year). This has been adjusted to the Profit & Loss Account. Year 2002-2003 : The turnaround year The performance during the year 2002-2003 was quite satisfactory. Not only the revenues have recorded an impressive growth, and the Company made an entry into new segments, but the Company could also wipe out its entire accumulated losses. , The newly established Oncology division successfully launched the generic version of Imatinib Mesylate - a life saving drug used in the treatment of chronic myeloid leukemia (CML). Launched in January 2003 (under the brand name of VEENAT), within five months, the brand could establish itself firmly in the market and the product could achieve a sales revenue of around Rs. 100 lakhs

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NATCO PHARMA LIMITED a month - a rarity in finished dosage formulations. What is more, your Company, perhaps, is the only Company in the world to manufacture both the bulk chemical and finished dosage formulations of Imatinib Mesylate in its generic form. The Company had followed a very dynamic price strategy with respect to VEENAT, which obviously had paid off well. The Company's strategy in pricing the brand at almost one tenth of the competitor brand available in the market is guided more by its intentions to reach the suffering masses in the country than by commercial considerations as such. In accordance with its philosophy of "making available quality medicines at affordable prices", NATCO has also launched a Patient Assistance Programme under which the medicine is distributed free of cost to patients who are not affordable. This programme has had a very successful beginning and is being administered and run in association with the Cancer Patients' Aid Association, Mumbai and the NATCO Trust. It is the intention of the Company to assist not less than 200 patients to begin with. It has been decided to review the programme periodically and effect changes in the manner of its administration to effectively reach a wider spectrum of suffering patients. Emboldened by its success in the Oncology segment, the Company followed the launch of VEENAT with ZOLDONAT (Zoledronic Acid 4 mg in injection form) and LETRONAT tablets (Letrozole)- both being cancer therapy drugs. The Company again scored a first with the launch of Zoldonat - when it became the first company in the world to manufacture both the bulk drug and finished dosage formulation - in its generic form. Both the products have been very carefully priced and your Directors are hopeful that they would become "star" brands in the basket of brands made available by the Company. The Company's entry in branded generics segment had taken off well and the Company had targeted for a manifold increase in the revenues from this segment in the coming year. Closely following its certification by the Therapeutic Goods Administration (TCA) - the Australian equivalent of US FDA, the Mekaguda plant has also been able to obtain ISO-14001 certification for its environmental management systems. The TGA approval and the ISO 14001 certification together testify to the global quality of the products manufactured by the Company at the Mekaguda plant. The Kothur plant had received ISO 9001 and Q9001-2000 certification for its quality management system in manufacture and supply of pharmaceutical products (with a scope of research and development). With the commissioning of one more module in the new block, the Plant is racing to trigger the US FDA and UK MCA inspections during the latter part of the current financial year. The plans for obtaining US FDA approval for some of the bulk drug products are also progressing according to schedule. On the contract manufacturing front, your Company continues to do well and has been able to bag repeated orders from customers. The revenues from this segment have crossed the Rs. 1 crore mark per month. The skills, world class facilities and abilities of the Company continue to attract customers for contract manufacturing from India and abroad. The Company has continued its efforts to strengthen and improve its abilities to undertake contract research activities on behalf of other companies - both Indian and overseas. During the current year, it is proposed to expand and develop this segment of business. Dividend In view of the necessity to conserve the available resources, your Directors regret their inability to recommend any dividend. Financial Restructuring Your Company has taken cognizance of the fact that there is an imperative need to reduce the debt burden of the Company and bring it to acceptable levels in relation to its size of business. The company had, therefore, started a series of negotiations with its lenders during the year under review and as a result, it has been possible for it to arrive at : .

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a) a one-time settlement of its dues to the Industrial Investment Bank of India (IIBI); b) a negotiated settlement of its dues to the Industrial Development Bank of India (IDBI). This is, however, being further negotiated; and c) a negotiated settlement of its dues to SBI Home Finance Limited. The debt restructuring package is yet to be sanctioned by Canara Bank, State Bank of Travancore and Industrial Finance Corporation of India Limited (IFCI). The Company is pursuing the matter with the respective lenders. Krishnapatnam Port Company Limited The development of the Port had received a new impetus following a decision by the Chennai Port to stop handling iron ore cargo effective 2005. Around 7 million tonnes of iron ore is exported from the Bellary-Hospet region through the Chennai port every year and with the pre-determined closure of Chennai port for handling iron ore cargo, the iron ore exporters have been compelled to look at alternatives available. The iron ore exporters (represented by the Federation of Indian Mineral Industries - FIMI) had commissioned the services of KPMC - the renowned consultancy firm to examine, evaluate and suggest various alternatives available. KPMG had, after a detailed study of several ports, recommended that the Krishnapatnam port is the most effective and efficient alternative available. As a consequence, some members of FIMI, including the National Mineral Development Corporation Limited (NMDC) had signed Memorandum of Understanding with Krishnapatnam Port Company Limited guaranteeing a cargo of 16.5 million tonnes of iron ore per annum. Krishnapatnam Port Company has appointed Infrastructure Leasing & Financial Services Limited (IL & FS) as project advisors and IL & FS would also be syndicating the equity and debt for the Project. Pre-qualification bids have been invited for construction of the Port and after evaluating the responses, five bidders have been invited to quote for the construction of the Project. The bids are expected to be received by end August, 2003. The Company expects to achieve the financial closure for the Project by the end of 2003. In the meanwhile, construction of the jetties - one for loading and another for unloading - is complete and at the request of the National Mineral Development Corporation Limited and a few other customers, it has been decided to commence lighterage activities. Consequent to the receipt of the pre-feasibility report for the new railway line between Hastavaramu in Cuddapah district and Krishnapatnam, the Railway Board has ordered for a detailed report which is expected to be available in a couple of months' time. , Directors Dr. K.U. Mada and Dr. P. Khadgapathi will retire at the ensuing Annual General Meeting and being eligible offer themselves for re-election. Notices in writing have been received from Members proposing their names for the office of Director. Directors' Responsibility Statement In compliance with the provisions of Section 217(2AA) of the Companies Act, 1956 the Directors confirm that: a) in the preparation of annual accounts, the applicable accounting standards have been followed; b) the Directors have selected such accounting policies as mentioned in Schedule 19 of the Annual Accounts and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the Company at the end of the financial year and of the profit or loss of the Company for that period; c) the Directors have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the aforesaid Act for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities; and d) the annual accounts have been prepared on a going concern basis.

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NATCO PHARMA LIMITED

With reference to the comments made by the Auditors in their report on the accounts, the Directors would like to clarify that: a) the Company had initiated legal proceedings against another body corporate for recovery of an amount of Rs. 1109 lakhs due from it, which includes Rs. 563 lakhs on account of job work charges, with a specific right to claim the amounts due on account of interest / storage charges (aggregating to Rs. 546 lakhs). The Company expects to be successful in its claim; b) in respect of the advances granted to companies promoted by the Company / Directors of the Company, no interest is being charged as a matter of policy. It is the intention of the Company to apply for and seek allotment of shares in some of these Companies and as per the undertaking given by the Company to IDBI, divestment of the proposed stake is to take place during the years 2003 and 2004. As and when such divestment takes place, the Company should be able to recover substantial amounts so as to cover the unapplied interest on the amounts advanced, keeping in view the progress made on these projects. Statutory Auditors M/s. Brahmayya & Company, Chartered Accountants, Hyderabad, the Statutory Auditors of the Company, hold office till the conclusion of the ensuing Annual General Meeting, and are eligible for re-appointment. The Board recommends their re-appointment. Internal Auditors M/s. Seshachalam & Company, Chartered Accountants, Hyderabad, who have been appointed by your Board to carry-out Internal Audit of the Company "last year will be continuing as Internal Auditors for this year as well. Cost Audit The Government of India had prescribed maintenance of cost accounting records and ordered cost audit under the provisions of Section 233B of the Companies Act, 1956, in respect of your Company's operations. Your Company is following the prescribed guidelines in maintaining the requisite records. Particulars of employees Employee drawing remuneration in excess of prescribed 'amount as specified in terms of Section 217(2A) of the Companies Act, 1956 is annexed. Particulars regarding Energy Conservation etc. Information on conservation of energy, technology absorption, foreign exchange earnings and outgo as required to be disclosed under the provisions of Section 217(1) (e) of the Companies Act, 1956 is enclosed and forms part of this Report. Listing Information The securities of the Company are listed with and are traded in, dematerialised form at the Stock Exchanges at Hyderabad, Mumbai, and Ahmedabad, and on the National Stock Exchange. The annual listing fees were paid to each of these Exchanges for the year 2002-2003. Facilities for demalerialisation have become fully operational. The ISIN No. of the Company is INE987B01018. Fixed Deposits There are no outstanding and overdue deposits as at 31st March, 2003. The Company had not accepted any deposits during the year.

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Acknowledgements Your Directors place on record their deep sense of gratitude for the support, cooperation and guidance received by the Company from the various departments / agencies of the Central and State Governments, IDBI, IFCI Ltd., ICICI Ltd., 1161 Limited, SBI Home Finance Ltd., Vysya Bank Housing Finance Limited and the consortium of banks led by Allahabad Bank and from National Insurance Company Limited. The Directors also thank the shareholders, officers and staff of the Company, for their excellent cooperation and dedicated work.

for and on behalf of the Board NATCO PHARMA LIMITED

Place : HYDERABAD V.C. NANNAPANENI Date : 30th June, 2003 Chairman & Managing Director

ANNEXURE TO DIRECTORS' REPORT

Information as per Section 217 (2A) of the Companies Act, 1956, read with the Companies (Particulars of Employees) Rules, 1975 and forming part of the Directors Report for the year ended 31st March, 2003.

Name Age Qualifications Date of Designation Remuneration Experi- Last Employe- in Rupees ence Employment ment held

V C Nannapaneni 57 M. PHARM, MS 3.10.81 Chairman & 52,89,6001- 26 Incharge of years Managing years Quality Director Assurance and R&D TIME CAP INC. USA

Note: 1. The conditions of Employment of Chairman & Managing Director is contractual. 2. Remuneration includes Salary, Perks and Company's contribution to Provident Fund.

for and on behalf of the Board NATCO PHARMA LIMITED

Place : HYDERABAD V.C. NANNAPANENI Date : 30th June, 2003 Chairman & Managing Director