NATCO PHARMA LIMITED 17Th Annual Report 1999 -2000

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NATCO PHARMA LIMITED 17th Annual Report 1999 -2000

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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 K..P. Ramakrishnan Director - IDBI Nominee Dr. Mohana R. Velagapudi Director Dr. K.V. Ranga Rao Director Smt. Durgadevi Nannapaneni Whole Time Director Dr. N. Ramakrishna Rao Director Dr. P. Khadgapathi Director & Executive Vice President (Tech.)

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 GM (Corporate Affairs) ORIENTAL BANK OF COMMERCE

Auditors Registered Office M/S. BRAHMAYYA & CO., NATCO HOUSE Chartered Accountants Road No.2 920, Tilak Road Banjara Hills Hyderabad - 500 001 Hyderabad - 500 033.

WORKS

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

Chemical Division Chemical - R & D Division Mekuguda. Kolhur Mandal B-l 1, Industrial Estate Mahahoobnagar Dist Sanafhnagar, Hyderabad Andlira Pradesh - 509 228. Andhra Pradesh - 500 018.

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NATCO PHARMA LIMITED ^ -^ NOTICE

Notice is given that the SEVENTEENTH Annual General Meeting of the Members of the Company will be held on Saturday, the 23rd day of December, 2000 at 11.30 a.m, at the Registered Office of the Company, Natco House, Road No.2, Banjara Hills, Hyderabad - 500 033, 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 2000, together with the Report of the Directors and the Auditors thereon. 2. To elect a Director in place of Dr. Mohana R.Velagapudi who retires by rotation and being eligible, offers himself for re-appointment. 3. To elect a Director in place of Dr. K .V. Ranga Rao, who retires by rotation and, being eligible, offers himself lor re-appointment. 4. To appoint Auditors lor 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, the following resolution as a Special Resolution: "RESOLVED THAT pursuant to the provisions of Section 81 (I A) and other applicable provisions, if any, ol the Companies Act, 1956, the relevant provisions of the Memorandum and Articles of Association of the Company and subject to such approvals, consents, permissions and sanctions as may be necessary from the SEBI, RBI, EIPB, Government of India, lenders to the Company and appropriate authorities, bodies or agencies and subject to such conditions as may be prescribed by them while granting such approvals, consents, permissions and sanctions and subject to such conditions and alterations which the Board of Directors of the Company (hereinafter referred to as the "Board"), if it thinks fit to accept in the interest of the Company, the Board be and is hereby authorised to offer, issue and allot Equity Shares or Share Warrants / Preference Shares/ Fully Convertible Debentures (FCD) / Partly Convertible Debentures(PCD) or other financial instruments tor an aggregate nominal value not exceeding Rs.15 Crores (Rupees Fifteen Crores only), to be issued at a rate to be calculated as per the guidelines issued by SEBI in this regard or such other rate as may be decided by the Board on rights basis to the members, Public. NRI, Promoters in one or more offer(s) on preferential basis including preferential allotment or Private Placement to Promoters, their Friends and Associates, Public, NRI, Indian / Foreign investors whether individuals, Institutions / Banks, Overseas Corporate Bodies(OCBs), Foreign Institutional Investors(FIIs) and/or incorporated bodies (including Companies) and/or any other body corporate and/ or trusts and/or mutual funds and/or local bodies and/or any combination thereof arid whether or not such investors are members of the Company, on such terms and conditions and in such tranche as may be decided by the Board in its absolute discretion. RESOLVED FURTHER THAT without prejudice to the generality of the above, the Board he and is hereby authorised to determine as to the terms and conditions of the said Ot'fer(s), the types and classes of investors to whom lo be offered, when to Offer, the number and value of the Offer(s) in each tranch and utilisation of the issue proceeds. RESOLVED FURTHER THAT tor the purpose of giving effect to the above Resolution, the Board be and is hereby authorised lo do all such acts, deeds, matters and things and execute all such deeds,

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documents, instruments and writings as it may in its absolute discretion deem fit, necessary or desirable, and pay any ices and commission and incur expenses in relation therein. RESOLVED FURTHER THAT (he Board he and is hereby authorised to delegate all or any of the powers herein conferred to any Committee of Directors or Managing Director or Wholetime/Executive Director or Director(s) or any other Officer(s) of the Company 10 give effect to the aforesaid Resolution." To consider and if thought fit. to pass with or without modification, the following resolution as an Ordinary Resolution: "RKSOLVKD THAT Shri R.Monani be and is hereby appointed as a Director of the Company who is liable lor retirement by rotation." To consider and if thought fit, to pass with or without modification, the following resolution as an Ordinary Resolution: "RESOLVED THAT Shri G.S.Murthy be and is hereby appointed as a Director of the Company who is liable for retirement by rotation." To consider and if thought fit. to pass with or without modification, the following resolution as an Ordinary Resolution: "RESOLVED THAT Dr. N.Ramakrishna Rao be and is hereby appointed as a Director of the Company who is liable for retirement by rotation." To consider and if thought fit, to pass with or without modification, the following resolution as an Ordinary Resolution: "RESOLVED THAT Dr. RKhadgapathi be and is hereby appointed as a Director of the Company who is liable for retirement by rotation."

By order of the Board for NATCO PHARMA LIMITED

Hyderabad M. ADINARAYANA Date: 14-11-2000 COMPANY SECRETARY & GM (CORPORATE AFEAIRS) NOTES 1. Explanatory Statement pursuant to section 173(2)of the Companies Act, !956 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 pruxy in order to be valid, must be deposited at the Registered Office of the Company duly completed and signed, at least 48 hours before the commencement of the meeting. 3. Members are requested to notify any change in their address immediately. 4. Members are requested (o bring the copy of the Annual Report to the Annual General Meeting. 5. Nomination facility is available as per (he guidelines and share transfers and related matters will be undertaken al the Registered Office of the Company. 6. The Register of Members and Share Transfer Books will remain closed from Thursday 21st, day of December. 2000 to Saturday 23rd, day of December. 2000 (both days inclusive).

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NATCO PHARMA LIMITED EXPLANATORY STATEMENT AS REQUIRED UNDER SECTION 173(2) OF THE COMPANIES ACT, 1956 Item No.5 Members may recall that at an Extraordinary General Meeting held on the 8th July, 2000, a Resolution for issue of shares on preferential basis to Promoters etc. was adopted. However, Company could not take effective steps on the Resolution. Hence it is proposed to include this item of business in this meeting as the validity of the previous Resolution had expired. The Company had approached the lead financial institution, the Industrial Development Bank of India, Mumbai, among other things for a reduction in the rates of interest on the existing loans. IDBI has, consequently, worked-out a debt-restructuring package for the Company and communicated the same vide their letter No. HO.CFD-I.No.348 dt. 16-08-2000. The package requires for infusion of funds by the promoters to the extent of Rs.15 crores (Rupees fifteen crores only) for which this resolution is proposed. The detailed terms and conditions including the issue price, terms of issue, premium etc. will be determined by the Board of Directors in accordance with the prevailing guidelines issued by the SEBI, Government of India, Reserve Bank of India, FIPB and other statutory and regulatory authorities. This resolution is an enabling one which your Board recommends for adoption by the members. None of the Directors are, in any way, interested or concerned in the resolution, except to the extent of their shareholding in the Company. Item No.6 Shri R.Monani was appointed as an Additional Director of the Company by the Board at their meeting held on 31st day of January, 2000. According to Section 260 of the Companies Act, 1956 he holds the office of the Director only upto the date of Annual General Meeting. Notice has been received from a member alongwith deposit under Section 257 of the Companies Act, 1956 proposing his candidature for the office of the Director. Shri R.Monani is a Graduate in B.Sc.(Economics) and a Member of A.C.M.A (London) who has got rich and varied experience especially in the areas of Finance and General Management. He was an Executive Director on the Board, incharge of Finance in ITC Ltd. from 1974-82 and on the Board of VST Industries Ltd. incharge of Finance between 1982-85. He was the Managing Director of Aegis Chemical Industries Ltd. during 1985-91 and his last assignment was as an Executive Vice President in Mahindra & Mahindra Ltd. between 1992-94 being incharge of Mahindra Nissan Allwyn Ltd. as its Executive Director. Your Directors recommend passing of the Resolution and none of the Directors of the Company except Shri R.Monani is concerned or interested in the Resolution. Item No.7 Shri G.S.Murthy was appointed as an Additional Director of the Company by the Board at their meeting held on 31 st day of January, 2000. According to Section 260 of the Companies Act, 1956 he holds the office of the Director only upto the date of Annual General Meeting. Notice has been received from a member alongwilh deposit under'S^ection 257 of the Companies Act, 1956 proposing his candidature for the office of the Director. Shri G.S.Murthy, Masters in Law(LL.M-), Fellow Member of ICSI (F.C.S.), Member of CAIIB who has 3

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vast experience specifically in the areas of Legal, Secretarial and General Management disciplines. He started his career as a Practicing Advocate and joined RBI Legal Department as an Officer. He later on moved to IDBI and served in various capacities and his last assignment was Advisor / Executive Direclor(Legal) of IDBI. He is presently a Member of the project called - Implementation Secretariat - Public Enterprises, Government of Andhra Pradesh. Your Directors recommend passing of the Resolution and none of the Directors of the Company except Shri G.S-Murthy is concerned or interested in (he Resolution. Item No.8 Dr.N.Ramakrishna Rao was appointed as an Additional Director of the Company hy the Board at their meeting held on 31st day of January, 2000. According to Section 260 of the Companies Act, 1956 he holds the tiff ice of the Director only upto the date of Annual General Meeting. Notice has been received from a member alongwith deposit under Section 257 of the Companies Act, 1956 proposing his candidature for the office of the Director. Dr. N.Ramakrishna Rao. a qualified Medical Doctor, who has got over twenty years of experience as a Physician in India. Iran and USA. For the last ten years he is associated with our Group Companies in General Management areas and also rendering his services as a Doctor to the Company. Your Directors recommend passing of the Resolution and none of the Directors of the Company except Dr.N.Ramakrishna Rao, Shri V.C.Nannapaneni, and Mrs.Durgadevi Nannapaneni arc concerned or interested in the Resolution. Item No.9 Dr.P. Khadgapathi, Ph.D., who is in the employment of the Company for the past thirteen years looking after Tech. Services including Formulations Research & Development was appointed as an Additional Director of the Company hy the Board at their meeting held on 31st day of January, 2000. According to Section 260 of the Companies Acl, 1956 he holds the office of the Director only upto the date of Annual General Meeting. Notice has been received from a member atongwilh deposit under Section 257 of the Companies Act, 1956 proposing his candidature for the office of the Director. Members at their Extraordinary General Meeting held on 8th July, 2000 have appointed Dr.P. Khadgapathi as Director & Executi\c Vice PresidcnUTech.) for a period of 5 years w.c.f.3 1-1-2000 on the remuneration set out in the said Resolution. The Company will immensely benefit from the services of Dr P.Khadgapalhi as a Member of the Board. Your Directors recommends passing of the Resolution and none of the Directors of the Company except Dr.P.Kfiudgapathi is concerned or interested in the Resolution.

By order of the Board for NATCO PHARMA LIMITED

Hyderabad M. ADINARAYANA Date: 14-i I-2000 COMPANY SECRETARY & GM {CORPORATE AFFAIRS*

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NATCQ PHARMA LIMITED "^. ^ DIRECTORS REPORT

To The Members,

Your Directors have pleasure in presenting the 17th Annual Report together with the audited accounts of the Company for the year ended on 31st March, 2000.

Operational Performance :

While there was depressed market condition in the bulk drug business with shrinking margins, the formulations segment showed stable situation. The first half of the year under report witnessed a higher level of activity in the bulk drug segment, principally because of the job works that the Company had undertaken for other manufacturers. This job work did not continue in the rest of the quarters and, the performance levels especially for the last two quarters were low.

The Company continued to undertake contract manufacturing and job work in the formulations sector for reputed companies, such as Procter & Gamble, Wycth Lederle, Ranbaxy Laboratories, Sun Pharmaceutical Industries, and Dr. Reddy's Laboratories. There has been no significant improvement either in volumes or incomes from sales of generic formulations.

The Company's efforls to hive off its bulk drug unit on reasonable terms did not succeed. Meanwhile, the management concentrated its attention on consolidating and establishing itself in this business segment.

A summary of the operating results for the year ended on 31st March, 2000 is given below :

All figures : Rs. lakhs

PARTICULARS 1999-2000 1997-1999 12 MONTHS 18 MONTHS

Turnover, including other income 8223.52 23919.44 Profit before interest, depreciation and tax 1177.62 1748.90 Interest 1926.09 3374.70 Profit / <-) Loss before depreciation and tax (748.47) (1625.80) Depreciation 371.95 529.13 Profit / (~) Loss before tax (1120.42) (2154.93) Provision for tax - - Less : Prior period adjustment 58.74 -- Profit / (-} Loss after tax (1061.68) (2154.93)

Financial Restructuring :

The Company had disproportionably large debts which had adverse effects on its performance. It was felt necessary to rectify the situation, especially since the Company had no longer a presence in the branded formulations segment which had been earlier contributing to turnover to a large extent. Efforts were, therefore, made in the year under review to bring down the debt and its cost. The Company had approached the

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Industrial Development Bank of India (IDBI), the lead financial institution, which designed a debt-restructuring package. This package, which was negotiated with all the lenders, has since been approved by IDBI and other major lenders and it is under consideration by the rest ot" them.

Under this package, which is under implementation, promoters would bring in additional i'unds to the extent of Rs. 15 crores in two installments during the year 2000-2001 (part of which would be utilized to clear over- due interest arrears to lenders, while the rest of the money would he utilized in the operations of the Company), and the lenders would effect an across the board reduction in rates of interest by approximately four percentage points, and waive the liquidated damages/penal interest.

The package also provides for a moratorium with deferment of repayment of all loans so as to commence repayment from 1st October, 2001. All the loans are expected to be repaid in a period of six years thereafter. The Company offered additional security to he given to the banks to cover the excess portion in the working capital which is being converted into a working capital term loan; the financial institutions agreed to cede the first charge over the Company's fixed assets in favour of the bankers on a pari-passu basis. In turn, the bankers are required to provide the Company with need based working capital limits.

As part of the package, the Company's investment in NATCO Pharma, USA, LLC., has been divested (after receiving requisite permissions and approvals) and the resultant sale proceeds were applied for liquidation of the dues to Export Import Bank of India, from whom the Company had availed of assistance for its investment in NATCO Pharma. USA. LLC. A one-time settlement was entered into with the Export Import Bank of India and the monies payable under the settlement were duly paid to the Export Import Bank of India. Sequel to this settlement, (he debt burden got reduced by about Rs. 1400 lakhs, while annual interest saving would approximately be of the order of Rs. 250 lakhs.

Implementation of debt-restructuring package and outlook for the future :

The assessment made by IDBI confirms the viability of the Company's operations with the restructuring package in place. In accordance with the package, the promoters have brought in an amount of Rs. 726 lakhs as at the end of September 2000, to augment the operations of the Company and for meeting the interest overdues. These funds do not carry any interest and the Board has proposed allotment of equity shares to the promoters against this contribution. The balance amount of Rs. 774 lakhs is to be brought in by the promoters by the end of March, 2001.

Consequent to the package having been approved, the lead hank, Allahabad Bank, and Corporation Bank, another member of the consortium, have restructured the working capital limits sanctioned by them. Other member banks of the consortium are actively considering me package for approval.

The Impact of the loss on sale of fixed assets of NATCO Pharma, USA, LLC., interest waivers that had accrued on account of the one-time settlement with the Export Import Bank of India and waivers granted by the lenders consequent to the debt restructuring package have been reflected in the financial statements for Ihe year ended on 31st March, 2000.

The Board wishes to place on record its deep appreciation and sincere gratitude to all the financial institutions, including Export Import Bank of India, and banks for their timely assistance and cooperation.

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NATCO PHARMA LIMITED

Simultaneous with the financial restructuring, the Company is undertaking an exercise in business restructuring. Firstly, it is proposed to re-launch branded formulations initially in the state of Andhra Pradesh. Necessary ground-work in this direction has already been initialed. Secondly, the Company is aiming at a perceptible and clear shift in its concentration to custom synthesized bulk chemical intermediates. While the branded formulations arc yet to be launched, it is observed that the planned shift from bulk drugs to custom synthesized bulk chemical intermediates has paid off. While the turnover in the first quarter of the current fiscal was around Rs. 13 crores, the turnover for the second quarter was around Rs. 20 crores, signifying an increase of around 54%. The Company proposes to continue this strategy while continuing its supplies of established hulk drug products like Cis + Hydroxy Lactum and Diltiazem to select overseas customers.

Krishnapatnam Port Co., Ltd.:

Plans for implementing the first phase of the project are on drawing board. Further progress is expected in the current financial year.

Fixed Deposits :

The outstanding deposits as at 31st March, 2000 is Rs. 3,10,000. There are, however, no over-due deposits.

Directors :

During the year under review, the nomination of Mr. M.K.R. Vinayak, IAS, has been withdrawn by the Andhra Pradesh Stale Financial Corporation. Dr. K.V. Ranga Rao ceased to be a whole-time Director effective 3rd April, 2000 while he continues to be on the Board. Mr. T. Ramakrishna had resigned from Ihc Board owing to his pre-occupation. The Board places on record its appreciation of the services rendered and guidance given from lime to time by Messrs. M.K.R. Vinayak, IAS, Dr. K.V. Ranga Rao and T. Ramakrishna.

During the year IDBI nominated Mr.K P Ramakrishnan, G.M, JNIDB, Hyderabad as its Nominee.

The Board had been broad-based during the year under report. Mr. Raj Monani, (formerly Managing Director of Aegis Chemical Indusirics Limited, and former Director - Finance of ITC Limiied), Mr. G.S. Murthy, (former Legal Adviser / Executive Director of IDBI), Dr. N. Ramakrishna Rao a qualified medical doctor, and Dr. P. Khadgapathi a doctorate in pharmacy joined the Board as Additional Directors during the year.

Messrs Raj Monani, G.S. Murthy and Dr. N. Ramakrishna Rao, and Dr.P Khadgapathi being Additional Directors, will cease to be Addiiional Directors at the ensuing Annual General Meeting and being eligible, offer themselves Tor election. Notices in writing have been received from members proposing the names of Messrs Raj Monani, G.S. Murthy, and Dr. N. Ramakrishna Rao and Dr.P Khadgapalhi for ihe office of Director.

Dr. Mohana R. Velagapudi and Dr. K.V. Ranga Rao, will retire at the ensuing Annual General Meeting and being eligible, offer themselves for re-election.

Auditors :

M/s. Brahmayya & Company, Chartered Accountants. Hyderabad, Siatutory Auditors of the Company, hold

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office till (he conclusion of the ensuing Annual General Meeting, and are eligible for re-appointment. The Board recommends their re-appointment.

Cost Audit :

The Government of India has prescribed maintenance of cost accounting records and ordered cost audit under the provisions of Section 233 B of the Companies Act, 1956, in respect of your Company. Your Company is following the prescribed guidelines in maintaining the requisite records.

Particulars of employees, etc. :

As prescribed undei the provisions of Section 217 (2A) of the Companies Act, 1956, particulars of employees drawing remuneration in excess of prescribed amounts is enclosed (o this Report. Information on conservaiion of energy, technology absorption, foreign exchange earnings and outgo as required (o be disclosed under the provisions of Section 217(l)(e) of the Companies Act, 1956, is also enclosed.

Listing Information :

The securities of the Company are listed with and are traded on the Stock Exchanges mentioned below, and the annual lifting fees were paid to each of these Exchanges for the year 2000-2001. a) The Hyderabad Stoek Exchange Limited, Hyderabad, h) The Stock Exchange. Mumbai. c) National Stock Exchange of India Limited. Mumbai. d) The Stock Exchange. Ahmedabad.

Effective 26th December 2000, the shares of your Company have been notified for compulsory trading in electronic form. Accordingly, the Company entered into requisite depository agreements with the National Securities Depository Limited and Central Depository Services (India) Limited. The relevant ISIN Number allotted to the securities of your Company is INE 987B01018.

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 Stale Governments, all- India financial institutions, the Export Import Bank of India, SBI Home Finance Limited, Vysya Bank Housing Finance Limited and the consortium of banks led by Allahabad Bank. The Directors also thank the shareholders, officers, ;md staff of the Company, for their excellent cooperation and dedicated work.

For and on behalf of the Board NATCO Pharma Limited,

Hyderabad. V.C. NANNAPANENI 14lh November, 2000 Chairman & Managing Director