HVA FOODS PLC -Prospectus

8/6/2019 HVA FOODS PLC -Prospectus

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I N S P I R E D B Y I N N O V A T I O N

PROSPECTUSHVA FOODS LIMITED

INITIAL PUBLICOFFERING

HELADIV TEAS.

GIVING THE WORLD

A TASTE OF SRI LANKA.

To be listed on the Diri Savi Board of the Colombo Stock Exchange

For further inquiries

please contact the Managers to the Oering





Oer for Subscription of

Nineteen Million Nine Hundred and TwentyEight Thousand Five Hundred and Ninety Eight

(19,928,598) Ordinary Voting Shares

at LKR 16 per share

The delivery o this Prospectus shall not under any circumstance

constitute a representation or create any implication or suggestion

that there has been no material change in the afairs o the Company

since the date o this Prospectus.

I you are in doubt regarding the contents o this document or i you

require any advice in this regard, you should consult your Stock Broker,

Bank Manager, Lawyer or any other Proessional Advisor.

This Prospectus is dated 03rd January 2011

Please note that upon the allotment o shares under this Ofer,

THE ALLOTTED SHARES WOULD BE CREDITED TO THE APPLICANT’S

CDS ACCOUNT. I you wish to open a CDS account, you may do so

through any one o the Members and Trading Members o the

CSE as set out in Annexure C or through any one o the Custodian

Banks as set out in Annexure E.



2 | HVA Foods Limited – Initial Public Oering

This Prospectus has been prepared by Acuity Partners (Private)

Limited (“Acuity”) on behal o HVA Foods Limited (“the Company”)

rom the inormation supplied by the Company and its Directors and/

or which is publicly available. The Company and its Directors having

made all reasonable inquiries, conrm that to the best o their

knowledge and belie the inormation contained herein is true and

correct in all material respects and that there are no other material

acts, the omission o which would make any statement herein

misleading. While Acuity has taken reasonable care to ensure ull and

air disclosure, Acuity does not assume responsibility or any

investment decision made by the investors based on the inormation

contained herein. In making an investment decision, prospective

investors must rely on their own examination and assessments o the

Company, including the risks involved.

No person is authorized to give any inormation or make representation

not contained in this Prospectus and i given or made, any such

inormation or representation must not be relied upon as having

been authorized by Acuity.

The Colombo Stock Exchange (“CSE”) has taken reasonable care to ensure

full and fair disclosure of information in this Prospectus. However, the

CSE assumes no responsibility for the accuracy of the statements made,

opinions expressed or reports included in the Prospectus. Moreover, the

CSE does not regulate the pricing of the shares, which is decided solely by

the Company/Issuer.



HVA Foods Limited – Initial Public Oering | 3

REGISTRATION OF THE PROSPECTUS

A copy of this Prospectus has been delivered to the Registrar of Companies of Sri Lanka for registration. The following

documents were attached to the copy of the Prospectus delivered to the Registrar of Companies.

à The written consent o the Managers to the Issue

The Managers to the Issue have given and have not before the delivery of a copy of the Prospectus for registration

withdrawn their written consent for the inclusion of their name as Managers to the Issue and for the inclusion of their statements/declarations in the form in which it is included in the Prospectus.

à The written consent o the Registrars to the Issue

The Registrars to the Issue have given and have not before the delivery of a copy of the Prospectus for registration

withdrawn their written consent for the inclusion of their name as Registrars to the Issue in the Prospectus.

à The written consent o the Auditors & Reporting Accountants to the Company

The Auditors & Reporting Accountants to the Company have given and have not before the delivery of a copy of

the Prospectus for registration withdrawn their written consent for the inclusion of their name as Auditors &

Reporting Accountants to the Company and for the inclusion of their report/statements in the form and context

in which it is included in the Prospectus.

à The written consent o the Lawyers to the Company

The Lawyers to the Company have given and have not before the delivery of a copy of the Prospectus for

registration withdrawn their written consent for the inclusion of their name as Lawyers to the Company in the

Prospectus.

à The written consent o the Bankers to the Issue

The Bankers to the Issue have given and have not before the delivery of a copy of the Prospectus for registration

withdrawn their written consent for the inclusion of their names as Bankers to the Company and the Bankers to

the Issue in the Prospectus.

A declaration has been made by each of the Directors of the Company conrming that each of them have read the provisions

of the Companies Act relating to the Issue of the Prospectus and that those provisions have been complied with.




REPRESENTATION

No person is authorized to give any information or make any representation not contained in this Prospectus and if

given or made, any such information or representation must not be relied upon as having been authorized by the

Company.

REGISTRATION OF THE PROSPECTUS IN JURISDICTIONS OUTSIDE SRI LANKA

This Prospectus has not been registered with any authority outside of Sri Lanka. This Prospectus does not constitute an

oer to sell or a solicitation of an oer to buy, nor there be any sale of any shares oered herein, to any person in any

circumstance or in any jurisdiction in which it is unlawful to make such an oer, solicitation or sale.

FORWARD LOOKING STATEMENTS

Any statements included in this Prospectus that are not statements of historical fact constitute “Forward Looking

Statements”. These can be identied by the use of forward looking terms such as “expect”, “anticipate”, “may”, “plan to”,

“believe”, “could” and similar terms or variations of such terms. However, these words are not the exclusive means of

identifying Forward Looking Statements. As such, all statements pertaining to expected nancial position, business

strategy, plans and prospects of the Company are classied as Forward Looking Statements.

Such Forward Looking Statements involve known and unknown risks, uncertainties and other factors including but not

limited to regulatory changes in the sectors in which the Company operates and its ability to respond to them, the

Company’s ability to successfully adapt to technological changes, exposure to market risks, general economic and scal

policies of Sri Lanka, inationary pressures, the performance of nancial markets both globally and locally, changes in

domestic and foreign laws, regulation of taxes and changes in competition in the industry and further uncertainties that

may or may not be in the control of the Company.

Such factors may cause actual results, performance and achievements to materially dier from any future results,

performance or achievements expressed or implied by Forward Looking Statements herein. Forward Looking

Statements are also based on numerous assumptions regarding the Company’s present and future business strategiesand the environment in which the Company will operate in the future.

Given the risks and uncertainties that may cause the Company’s actual future results, performance or achievements to

materially dier from that expected, expressed or implied by Forward Looking Statements in this Prospectus, investors

are advised not to place sole reliance on such statements.

INVESTMENT CONSIDERATIONS

It is important that this Prospectus is read carefully prior to making an investment decision. For information concerning

certain risk factors, which should be considered by prospective investors, see “Investment Considerations and Associated

Risk Factors” in Section 8.0 of this Prospectus.

PRESENTATON OF CURRENCY INFORMATION AND OTHER NUMERICAL DATA

The nancial statements of the Company and currency values of economic data or industry data in a local context will

be expressed in Sri Lankan Rupees. References in the Prospectus to “LKR” are to the lawful currency of Sri Lanka.

References to USD are to United States Dollars, the ocial currency of the United States of America.

Certain numerical gures in the Prospectus have been subject to rounding adjustments; accordingly numerical gures

shown as totals in certain tables may not be an arithmetic aggregation of the gures that precede them.




Contents

SALIENT FEATURES AT A GLANCE .................................................................................................................................................................................8

DEFINITIONS / INTERPRETATIONS .......................................................................................................... .......................................................................9

1.0 CORPORATE INFORMATION.............................................................................................................................................. ................................ 10

2.0 RELEVANT PARTIES TO THE OFFERING ........................................................................................................ .................................................. 11

3.0 DETAILS OF THE OFFERING ........................................................................................................... .................................................................... 12

3.1 The Oering ..................................................................................................................................................................................................................................12

3.2 Nature of the Oered Shares ..............................................................................................................................................................................................12

3.3 Size of the Issue ...........................................................................................................................................................................................................................12

3.4 Oer Price .......................................................................................................................................................................................................................................12

3.5 Objectives of the Oering ....................................................................................................................................................................................................12

3.6 Cost of the Oering ..................................................................................................................................................................................................................13

3.7 Listing ................................................................................................................................................................................................................................................13

3.8 Subscription List and Closure Date.................................................................................................................................................................................133.9 Eligible Applicants .....................................................................................................................................................................................................................14

3.10 Procedure for Applications ..................................................................................................................................................................................................14

3.10.1 The Prospectus and Application Form.................................................................................................................................................14

3.10.2 Number of Shares Applied ..........................................................................................................................................................................15

3.10.3 Identication Information ............................................................................................................................................................................15

3.10.4 Responsibility of a Non-Resident Investor .........................................................................................................................................16

3.10.5 Margin Trading ....................................................................................................................................................................................................16

3.10.6 Applications made under Power of Attorney ................................................................................................................................16

3.10.7 Joint Applications..............................................................................................................................................................................................16

3.10.8 Multiple Applications ......................................................................................................................................................................................16

3.10.9 Rejection of Applications .............................................................................................................................................................................17

3.10.10 Submission of Applications ........................................................................................................................................................................17

3.11 Payment of Application Monies .......................................................................................................................................................................................17

3.11.1 Mode of Remittance ........................................................................................................................................................................................17

3.11.2 Cheques or Bank Drafts – Resident Sri Lankan Investors ..........................................................................................................18

3.11.3 Bank Guarantees – Resident Sri Lankan Investors.........................................................................................................................18

3.11.4 Foreign Currency Remittance ....................................................................................................................................................................18

3.11.5 Restrictions Applicable to Foreign Citizens Resident in Sri Lanka ......................................................................................20

3.12 Banking of Payments ...............................................................................................................................................................................................................20

3.13 Returning of Monies of Rejected Applications .......................................................................................................................................................20

3.14 The Basis of Allotment ............................................................................................................................................................................................................20

3.15 Refunds on Applications .......................................................................................................................................................................................................213.16 Successful Applicants and CDS Lodgement ...........................................................................................................................................................22

3.17 Transferability of Oered Shares .......................................................................................................................................................................................22

3.18 Declaration to the Colombo Stock Exchange and Secondary Market Trading ..................................................................................22

4.0 BUSINESS OPERATIONS OF HVA FOODS LIMITED .................................................................................................... ................................ 23

4.1 Group Structure ..........................................................................................................................................................................................................................23

4.2 Products Oered .......................................................................................................................................................................................................................23

4.2.1 Value Added Tea Based Products ............................................................................................................................................................24

4.2.2 Tea Extract Based Products..........................................................................................................................................................................28

4.2.3 Tea Concentrate Based Products .............................................................................................................................................................29

4.2.4 Franchise Operation ........................................................................................................................................................................................30

4.2.5 Revenue Breakup of the Products Oered ........................................................................................................................................30




4.3 Markets .............................................................................................................................................................................................................................................31

4.4 Competition .................................................................................................................................................................................................................................. 39

4.5 Degree of Dependence on Key Customers and Suppliers ..............................................................................................................................40

4.6 Details of Material Indebtedness .....................................................................................................................................................................................40

4.7 Working Capital ...........................................................................................................................................................................................................................41

4.8 Dividend Policy............................................................................................................................................................................................................................ 41

4.9 Litigation, disputes and contingent liabilities ..........................................................................................................................................................414.10 Patents, Trade marks and Brands Owned by the Company ...........................................................................................................................42

4.11 Share Transfer of HVA Holdings (Private) Limited to HVA Foods Limited ................................................................................................42

5.0 TEA INDUSTRY ..................................................................................................... ................................................................................................. 43

5.1 History ...............................................................................................................................................................................................................................................43

5.2 Overview – Contribution to the Economy ................................................................................................................................................................43

5.3 Overview – Sri Lanka Tea Production ............................................................................................................................................................................44

5.4 Tea Export Market ......................................................................................................................................................................................................................45

5.5 Regulatory Environment .......................................................................................................................................................................................................46

5.6 Value Added Tea Exports .......................................................................................................................................................................................................47

6.0 SRI LANKAN FAST MOVING CONSUMER GOODS INDUSTRY (FMCG) .......................................................................................... ...... 49

6.1 Drivers of Growth of the Sri Lankan FMCG Industry ...........................................................................................................................................49

6.2 Global Soft Drinks Industry ..................................................................................................................................................................................................51

6.3 Ready to Drink Tea (RTD Tea) .............................................................................................................................................................................................. 52

6.4 Global Personal Care Industry ............................................................................................................................................................................................52

7.0 FUTURE DIRECTION AND PROSPECTS ............................................................................................. ............................................................. 53

7.1 Future Direction and Prospects......................................................................................................................................................................................... 53

8.0 INVESTMENT CONSIDERATIONS AND ASSOCIATED RISK FACTORS ............................................................................................. ...... 54

8.1 Risk Factors .....................................................................................................................................................................................................................................54

8.2 Industry Specic Risks .............................................................................................................................................................................................................548.3 Company Specic Risks..........................................................................................................................................................................................................54

9.0 CORPORATE STRUCTURE .................................................................................................... ............................................................................... 56

9.1 The Board of Directors ............................................................................................................................................................................................................56

9.2 The Board of Directors of HVA Lanka Exports (Private) Limited ....................................................................................................................56

9.3 Proles of the Board of Directors ......................................................................................................................................................................................57

9.4 Directors’ Interest in Shares ..................................................................................................................................................................................................58

9.4.1 Directors’ Direct and Indirect Shareholdings in the Company..............................................................................................58

9.4.2 Sale or Purchase of Shares by directors ...............................................................................................................................................58

9.4.3 Directors’ Emoluments ...................................................................................................................................................................................58

9.4.4 Other Directorships Held by the Board ...............................................................................................................................................589.4.5 Directors’ Interest in Assets .........................................................................................................................................................................60

9.4.6 Directors’ Interest in any Material Contracts .....................................................................................................................................60

9.4.7 Statement – Board of Directors ...............................................................................................................................................................60

9.5 Corporate Governance Practices .....................................................................................................................................................................................60

9.6 Remuneration Committee ...................................................................................................................................................................................................61

9.7 Audit Committee .......................................................................................................................................................................................................................61

9.8 Senior Management ................................................................................................................................................................................................................ 61

9.8.1 Senior Managements’ Emoluments .....................................................................................................................................................62

9.9 Statement – Chairman ...........................................................................................................................................................................................................62

9.10 Details of the Management Agreements ...................................................................................................................................................................63

9.11 Human Resources ......................................................................................................................................................................................................................63

9.12 Information Technology ........................................................................................................................................................................................................63




10.0 CAPITAL STRUCTURE .................................................................................................... ...................................................................................... 64

10.1 An Overview of the Capital Structure ...........................................................................................................................................................................64

10.2 Free Transferability of Shares ...............................................................................................................................................................................................64

10.3 Other Securities...........................................................................................................................................................................................................................64

10.4 Takeover Oers ............................................................................................................................................................................................................................64

10.5 Share Re-Purchases or Redemptions.............................................................................................................................................................................64

10.6 Ten Largest Shareholders as at 03rd January 2011 ...............................................................................................................................................6410.7 Major Shareholders of HVA Lanka Exports (Private) Limited from 1990 to date ................................................................................65

10.8 Post IPO Shareholding Structure ......................................................................................................................................................................................65

10.9 Ratios .................................................................................................................................................................................................................................................66

11.0 MANAGEMENT DISCUSSION AND ANALYSIS ........................................................................................... .................................................. 67

11.1 Operating Results ......................................................................................................................................................................................................................67

11.2 Performance of Operations for the Five Years Ended 31st March 2010 ...................................................................................................68

12.0 STATUTORY AND OTHER GENERAL INFORMATION ................................................................................................... ............................... 71

12.1 Hosting of Prospectus, Application Form and the Articles of Association on the Web .................................................................71

12.2 Inspection of Documents .....................................................................................................................................................................................................7112.3 Brokerage ........................................................................................................................................................................................................................................71

12.4 Underwriting ................................................................................................................................................................................................................................71

13.0 TAXATION ....................................................................................................... ........................................................................................................ 72

13.1 Corporate Taxation ....................................................................................................................................................................................................................72

13.2 Withholding Tax (WHT ) for Dividends ..........................................................................................................................................................................72

13.3 Economic Service Charge (ESC)........................................................................................................................................................................................72

13.4 Taxation of Share Transactions...........................................................................................................................................................................................72

13.5 Stamp Duty ....................................................................................................................................................................................................................................72

14.0 STATUTORY DECLARATIONS............................................................................................................................................. ................................ 73

ACCOUNTANT’S REPORT AND FIVE YEAR SUMMARY ................................. ....................................................................................................... 75

ACCOUNTANT’S REPORT FIVE YEAR SUMMARY AND LIMITED

REVIEW AS AT 30th SEPTEMBER 2010 .................................................................................................. .................................................................... 76

INTERIM FINANCIAL STATEMENTS FOR THE YEAR ENDED 30TH SEPTEMBER 2010 ..............................................................................107

ANNEXURE A – INDEX ON TABLES ILLUSTRATED IN THE PROSPECTUS .....................................................................................................128

ANNEXURE B – INDEX ON CHARTS AND FIGURES ILLUSTRATED IN THE PROSPECTUS .......................................................................129

ANNEXURE C – COLLECTION POINTS ................................................................................................... ..................................................................130

ANNEXURE D – ‘HELADIV’ BRAND EQUITY .......................................................................................... .................................................................133

ANNEXURE E – CUSTODIAN BANKS ...................................................................................................... ..................................................................134




SALIENT FEATURES AT A GLANCE

Issuer HVA Foods Limited

Number and Type of Securities to be Issued 19,928,598 Ordinary Voting Shares of the Company

Issue Price LKR 16 per share

Minimum Subscription per Application Minimum subscription per application is 100 shares

(LKR 1,600). Applications exceeding the minimum

subscription should be in multiples of 100 shares

Issue Opening date 12th January 2011

Issue Closing date 01st February 2011 or on the date on which the Issue is

oversubscribed

Amount to be Raised LKR 318,857,568

Please note that upon the allotment o shares under this Ofer,

THE ALLOTTED SHARES WOULD BE CREDITED TO THE APPLICANT’S

CDS ACCOUNT. I you wish to open a CDS account, you may do so

through any one o the Members and Trading Members o theCSE as set out in Annexure C or through any one o the Custodian

Banks as set out in Annexure E.




DEFINITIONS / INTERPRETATIONS

The following denitions/interpretations apply throughout this Prospectus, unless the context otherwise requires:

“Application Form ” The ocial Application Form and/or photocopies of the ocial Application

Form

“Bn” Billion

“BOI” Board of Investment of Sri Lanka

“CDS” Central Depository Systems (Pvt) Limited

“CIS countries” A regional organization whose participating countries are former Soviet

Republics, formed during the breakup of the Soviet Union

“Closure Date” The date of closure of the subscription list

“Companies Act” Companies Act No. 07 of 2007

“The Company” or “HVA Food” HVA Foods Limited“CSE” Colombo Stock Exchange

“Directors” The Directors for the time being of the Company, unless otherwise stated

“GOSL” Government of the Democratic Socialist Republic of Sri Lanka

“IPO” Initial Public Oering

“Issue” Issue of shares of the Company to the Public as envisaged by this Prospectus

“Issuer” HVA Foods Limited

“LKR” Sri Lankan Rupees

“Market Day” Any day on which the CSE is open for trading

“Mn” Million

“MT” Metric Ton

“Managers to the Ofering” Acuity Partners (Private) Limited

“NIC” National Identity Card

“Ofered Shares” Nineteen Million Nine Hundred and Twenty Eight Thousand Five Hundred

and Ninety Eight (19,928,598) new Ordinary Shares each issued by the

Company, to the general public at the Share Oer Price

“Ofer or Subscription” or “Ofering” An invitation to the public by the Company to subscribe for Nineteen Million

Nine Hundred and Twenty Eight Thousand Five Hundred and Ninety Eight

(19,928,598) new Ordinary Shares of the Company

“Ofering Period” 12th January 2011 to 01st February 2011

“Ofer Price” LKR 16/- per Oered Share

“Ordinary Share(s)” or “shares” Ordinary Voting Share(s) of the Company

“POA” Power of Attorney

“SEC” Securities & Exchange Commission of Sri Lanka




1.0 CORPORATE INFORMATION

Issuer HVA Foods Limited

Registered Oce

(HVA Foods Limited)

No. 39/A, Linton Road, Kandana, Sri Lanka

Registered Oce(HVA Lanka Exports (Pvt.) Limited)

No. 39/A, Linton Road, Kandana, Sri Lanka

Telephone Number o the Company 011 223 8714

Company Registration Number

(under the Companies Act No. 07 o 2007)

PV 1765

Re- Registration Number

(as a Public Company)

PV/PB 1765

Date, Place and Authority o Incorporation Incorporated as a Private Limited Liability Company on 22nd

August 1997 in Colombo at Registrar Of Companies and

converted to a Public Company on 03rd November 2010 inColombo at Registrar of Companies

Company Secretary P.R. Secretarial Services (Pvt.) Limited

No. 59, Gregory’s Road, Colombo 07, Sri Lanka.

T: 2697893, 2697894, 2686639

Reporting Accountants /

Auditors o the Company

KPMG, Ford, Rhodes, Thornton & Co.

32 A, Sir Mohamed Macan Marker Mw.,

P.O. Box 186, Colombo 07, Sri Lanka

Lawyers o the Company Paul Ratnayeke Associates,No. 59, Gregory’s Road, Colombo 07, Sri Lanka

Bankers o the Company Bank o Ceylon

Head Oce, No. 4,

Bank of Ceylon Mawatha, Colombo 01, Sri Lanka

Seylan Bank PLC

No. 90, Galle Road, Colombo 03, Sri Lanka

Hongkong and Shanghai Banking Corp.

No. 24, Sir Baron Jayathilake MawathaColombo 01, Sri Lanka

Board o Directors

Name Designation

Mr. A. R. H. Fernando Chairman

Mr. H. J. Fernando Executive Director

Mr. J. Raddalgoda Executive Director

Mrs. V. S. Amunugama Fernando Non-Executive Director

Mr. N. C. Vitarana Non-Executive (Independent Director)

Mr. J. H. P. Ratnayeke Non-Executive (Independent Director)




2.0 RELEVANT PARTIES TO THE OFFERING

Financial Advisors and Managers to the Ofering Acuity Partners (Private) Limited

53, Dharmapala Mawatha,

Colombo 03

T: 2206206

Registrars to the Ofering P W Corporate Secretarial (Pvt) Ltd

3/17, Kynsey Road,

Colombo 08, Sri Lanka

T: 4610476, 4640360-3

Bankers to the Ofering DFCC Vardhana Bank

73, W.A.D.Ramanayake Mawatha,

Colombo 02, Sri Lanka

Lawyers to the Ofering Paul Ratnayeke Associates,

No. 59, Gregory’s Road, Colombo 07,

Sri Lanka




3.0 DETAILS OF THE OFFERING

3.1 The Ofering

The Oering contemplated herein shall constitute an invitation made to the general public to purchase

Nineteen Million Nine Hundred and Twenty Eight Thousand Five Hundred and Ninety Eight (19,928,598) new

Ordinary Shares of the Company at the Oer Price.

3.2 Nature o the Ofered Shares

The Oered Shares shall rank equal and pari passu in all respects with the existing Ordinary Shares of the

Company with the right to vote, the right to an equal share in any dividend that may be paid by the Company

after the allotment of the Oered Shares and the right to an equal share in the distribution of the surplus

assets of the Company in a liquidation.

3.3 Size o the Issue

If fully subscribed, the Oering would raise Sri Lankan Rupees Three Hundred and Eighteen Million Eight

Hundred and Fifty Seven Thousand Five Hundred and Sixty Eight (LKR 318,857,568).

3.4 Ofer Price

The Oer Price will be LKR 16/-. The Board of Directors of HVA Foods Limited is of the opinion that the Oer

Price is fair and reasonable to the Company and to all existing shareholders of the Company.

3.5 Objectives o the Ofering

The Company intends to raise funds through this Oering to nance the following, in the order of priority.

i. Allocation of LKR 45 million for payment for the acquisition of HVA Holdings (Private) Limited for the

assignment of international brand rights of “HELADIV” to HVA Foods Limited. The transfer of 18,367 sharesof HVA Holdings (Private) Limited to HVA Foods Limited was carried out on the 29th of September 2010

and prior to the transfer, HVA Holdings (Private) Limited was a 100% owned subsidiary of Lake Drive

Holdings (Private) Limited. Lake Drive Holdings (Private) Limited is a company owned by Mr. A.R.H.

Fernando, Mrs. V.S. Amunugama Fernando and Mr. H.J. Fernando. The international brand rights are

registered under HVA Holdings (Private) Limited while the local brand registration of “HELADIV” is registered

under HVA Foods Limited. The aforesaid amount of LKR 45 million will be the deferred payment for the

transfer of 100% ownership of HVA Holdings (Private) Limited to HVA Foods Limited. Hence, the acquisition

will now give total jurisdiction over the brand in Sri Lanka and worldwide covering the manufacture and

export of “HELADIV” branded products without hindrance. Moreover, infringement of the brand rights in

any foreign country where the brand is registered will also now come under the control of HVA Foods

Limited. Price Water House Coopers has conducted a value assessment of the brand on 01st October2010 and has valued it to be in the range of USD 1.08 million to USD 1.24 million. Please refer Annexure D

of this Prospectus.

ii. Approximately LKR 95 million will be utilized to reduce gearing of the Company.

Term Loan Settlement

Seylan Bank (USD 650,000 @ LKR 115/-) LKR 74,750,000.00

Bank of Ceylon LKR 20,000,000.00

Total LKR 94,750,000.00

For further details on the above term loans please refer Section 4.6 of this Prospectus.




iii. Approximately LKR 102 million will be utilized for Ice Tea plant to be upgraded from a pilot plant to a

commercial plant and for expansion of facilities in the existing factory. Current capacity of the pilot plant

is 100,000 litres of ice tea per month. Subject to the current trial shipments and initial marketing eorts

bringing in improved orders, the capacity in the medium term needs to be increased to 300,000 litres per

month. This will require approximately LKR 26 million which will cover the securing and expansion of land

and building and installation of machinery.

As for the expansion of the existing factory, most of the current machines need backups and increased

capacity. The current tea bagging capacity of the Company is well below the required demand. Hence,

approximately LKR 76 million will be utilized for expansion of the current operations.

iv. The remaining balance to nance the incremental working capital requirements of HVA Foods Limited

such as retiring expensive short term borrowings and to ensure smooth and ecient operations at the

factory by maintaining adequate buer stocks.

The Company expects to utilize the IPO proceeds immediately following the Oering. The Company

believes that implementation of activities mentioned herein is imperative for the growth of the business

of the Company.

The Company is condent that it can meet any shortfall in the event of an under subscription through

internally generated funds and borrowings.

3.6 Cost o the Ofering

The Directors estimate that the total cost of the Issue including the Managers’ fees, Registrars’ fees, fees payable

in respect of services rendered by any lawyers, accountants, postage, printing and marketing costs, brokerage,

stamp duty payable on the Issue of shares, etc. will be approximately LKR 10.924 million. Such costs will be

borne by the Company from internally generated funds.

3.7 Listing

The Oering herein contemplated comprises of Nineteen Million Nine Hundred and Twenty Eight Thousand

Five Hundred and Ninety Eight (19,928,598) Ordinary Voting Shares. If fully subscribed, the Oered Shares will

amount to 30% of the issued and paid up Ordinary Voting Shares of the Company subsequent to the Oering.

An Application has been made to the CSE for permission to deal in and for a listing of Sixty Six Million Four

Hundred and Twenty Eight Thousand Six Hundred and Sixty (66,428,660) Ordinary Voting Shares being the

entirety of the issued and paid up Ordinary Voting Shares of the Company subsequent to the Oering.

Upon the successful completion of the Oering, the Company will be listed on the Diri Savi Board of the CSE,

subject to compliance with Rule 2.1.3 of the CSE Listing Rules.

3.8 Subscription List and Closure Date

The subscription list for the Oered Shares will open at 9.00 a.m. on 12th January 2011 and shall remain open

for fourteen (14) Market Days until closure at 4.30 p.m. on 01st February 2011. The Board reserves the discretion

to close the subscription list on any Market Day within the period of fourteen (14) Market Days irrespective of

the number of shares subscribed by providing one (01) Market Day’s prior notice to the CSE.

In the event of an over subscription of the Oered Shares prior to the date scheduled as the closing date of

the period for subscription, the Company shall inform the CSE in writing immediately of such fact and the

subscription list will be closed at 4.30 p.m. on the same day on which it is fully subscribed with the notication

to the CSE.




3.9 Eligible Applicants

Applications are invited from the following categories of Applicants:

• Citizens of Sri Lanka who are resident in or outside Sri Lanka and above 18 years of age;

• Companies, corporations or institutions incorporated or established within Sri Lanka;

• Corporate bodies incorporated or established outside Sri Lanka;• Approved provident funds and contributory pension schemes registered/incorporated/established in Sri

Lanka (in this case applications should be in the name of the Trustee/Board of Management in order to

facilitate the opening of the CDS account);

• Foreign citizens above 18 years of age (irrespective of whether they are resident in Sri Lanka or overseas);

• Global, regional and country funds approved by the SEC.

Please note that Applications made by individuals under 18 years of age or those in the names of sole

proprietorships, partnerships, unincorporated trusts and non-corporate bodies will be rejected at the outset.

3.10 Procedure or ApplicationsApplications must be made in the manner set out below. Applications duly completed should be submitted

in the manner set out in Section 3.10.10 hereunder.

3.10.1 The Prospectus and Application Form

The Prospectus and Application Form will be available free of charge from the collection points listed in

Annexure C. Investors must apply for shares on the Application Form, which constitutes part of this Prospectus.

The Application Form should be legibly completed and be received by the Registrars to the Oering. The

Application Form and the Prospectus can also be downloaded from www.cse.lk, and www.heladiv.com. Exact

size photocopies of the original Application Form will also be permissible.

Care must be taken to follow the instructions on the reverse of the Application Form. Applications that do not

strictly conform to such instructions and additional conditions set out hereunder or which are illegible may be

rejected.

Please note that upon the allotment of shares under this Oer, THE ALLOTTED SHARES WOULD BE CREDITED

TO THE APPLICANT’S CDS ACCOUNT. If you wish to open a CDS account, you may do so through any one of the

Members and Trading Members of the CSE as set out in Annexure C or through any one of the Custodian Banks

as set out in Annexure E.

Applicants have the option of having their shares ‘locked’* in the CDS. Shares that are locked* would not be

available for trading purposes and would not be visible to the participant. Such applicants would have to ll ina separate section in the IPO Application Form for this purpose. If the applicant has not specied that his/her

shares need to be deposited to his/her ‘locked’ *balance, please note that the said shares would be deposited to

applicant’s ‘trading’ balance.

* Denition and operation of a ‘locked’ balance in the CDS

In order to preserve the condentiality of shareholder information and to ensure that securities are not made

available for trading for those shareholders who do not want to trade the securities the CDS would provide a

mechanism where securities can be “locked” in the CDS account.

The CDS would maintain two balances for each CDS account, namely a trading balance and a locked balance. The trading balance would be visible to the CDS participant and all dealings and trading would be permitted

on the said trading balance, as done presently.




As opposed to the trading balance, the locked balance will not be visible to the CDS participant and all

dealings on such locked balance would be suspended thereby maintaining the condentiality of the

information and also safeguarding the account holder from an unauthorized sale by a broker.

At the option and request of an account holder the CDS would transfer a named quantity of shares from the

locked balance to the trading balance of a CDS account and /or from the trading balance to the locked

balance.

3.10.2 Number of Shares Applied

Application should be made for a minimum of one hundred (100) shares or in multiples of hundred (100) shares

thereof.

Applications made for less than one hundred (100) shares or for a number which is not in multiples of hundred

(100) shares will be rejected and accompanying cheques or bank drafts or bank guarantees will not be sent for

clearing and be returned via ordinary post at the risk of the Applicant, or in the case of Joint Applicants, the

rst named Applicant. The cheque or bank draft or bank guarantee should be issued to the exact value of thenumber of shares applied for multiplied by the Oer Price. Cheques or bank drafts or bank guarantees not

conforming to the above requirement will be rejected at the outset. Please refer Section 3.11.1 for details with

respect to the mode of remittance.

3.10.3 Identication Information

All Applicants should disclose their identication/registration information by lling in the space provided in

the Application Form for this purpose.

Applicants are requested to state their residency and nationality in the appropriate cages provided in the

Application Form.

The NIC, passport or company registration number as the case may be, must be stated in the Application Form

and any Application Form which does not provide the appropriate identication information will be strictly

rejected.

Tabulated below is the relevant identication information that a prospective investor should provide

depending on the legal status:

Citizenship/Legal Form

NIC Number Passport

Number

Company

RegistrationNumber

Common Seal

or RubberStamp

Sri Lankan Citizens ✓

Sri Lankan Citizens with no NIC – Note I ✓

Foreign Citizens – Note II ✓

Corporate Entities – Note III & Note IV ✓ ✓

Note I: Please note that upon the allotment of shares under this Oer, THE ALLOTTED SHARES WOULD BE

CREDITED TO THE APPLICANT’S CDS ACCOUNT. If you wish to open a CDS account, you may do so

through any one of the Members and Trading Members of the CSE as set out in Annexure C or through

any one of the Custodian Banks as set out in Annexure E.

Note II: In the case of Sri Lankan citizens the passport number will be accepted only when the NIC number is

not available. The CDS account must be for the same passport number.




Note III: Foreign citizens must state the passport number in the space provided.

Note IV: The company registration number must be provided. The common seal or rubber stamp should be

axed and the Application Form duly signed as stipulated in the constitutional documents of such

Applicants.

3.10.4 Responsibility of a Non-Resident Investor Non-resident investors may be aected by the laws of the jurisdiction of their residence. If the non-resident

investors wish to apply for the shares at the IPO, it is their responsibility to comply with the laws relevant to the

jurisdiction of their residence and of Sri Lanka.

3.10.5 Margin Trading

Applicants who wish to apply through their margin trading account, should submit the Application in the

name of the “margin provider/Applicant ’s name” signed by the margin provider. The Applicants should state

the relevant CDS account number relating to the margin trading account in the space provided for the CDS

account number in the Application Form.

The NIC, passport or company registration number of the Applicant as the case may be, must be stated in the

Application Form.

A photocopy of the margin trading agreement must be submitted along with the Application.

Please note that the margin provider can apply under its own name and such Applications will not be

construed as multiple Applications (details of multiple Applications are available under Section 3.10.8).

3.10.6 Applications made under Power of Attorney

In the case of Applications made under Power of Attorney, a copy of the said POA, certied by a Notary Public

to be a true copy of the original, should be lodged with the Registrars to the Oering along with the ApplicationForm. The original POA should not be attached.

3.10.7 Joint Applications

Joint Application Forms should not exceed three Applicants (except in the case of executors, administrators or

heirs of a deceased member). Joint Applicants should note that all parties should either be residents of Sri

Lanka or non-residents. An Applicant of a Joint Application shall not apply through a separate Application

Form either individually or jointly. Only one Application will be accepted on behalf of a natural person.

3.10.8 Multiple Applications

An Applicant can apply under only one Application Form. If an Applicant has applied under more than one

Application Form it will be construed as multiple Applications. An Applicant of a Joint Application, applying

through another Application Form is also deemed to have made multiple Applications.

An Applicant who has made an Application under a margin trading account should not apply individually or

jointly on a separate Application Form. Such Applications will also be construed as multiple Applications.

The Company/Managers/Registrars to the Oering reserve the right to reject all multiple Applications and

suspected multiple Applications or to accept only one Application Form at their discretion.




3.10.9 Rejection of Applications

• Application Forms which are incomplete in any way and/or are not in accordance with the terms and

conditions set out in this Prospectus will be rejected at the absolute discretion of the Company/Managers/

Registrars to the Oering.

• Any Application Form which does not provide the NIC, passport or company registration number as the

case may be, will be strictly rejected.

• Applications delivered by hand after 4.30 p.m. local time on the Closure Date of the Oering will be rejected.

Applications received by courier/post after 4.30 p.m. local time on the succeeding Market Day immediately

following the Closure Date of the Oering, will also be rejected even if they carry a courier acceptance date/

postmark date earlier than the Closure Date.

• Applications made for less than one hundred (100) shares or for a number which is not in multiple of

hundred (100) shares will be rejected.

• In the case of multiple Applications and suspected multiple Applications, the Company/Manager/Registrars

to the Oering reserve the right to reject all or to accept one Application Form at their discretion.

• An Application Form accompanied by two or more cheques or bank drafts or bank guarantees will be

rejected at the outset.

• Applications made by individuals below 18 years of age or those in the names of sole proprietorships,

partnerships, unincorporated trusts and non-corporate bodies will be rejected.

Notwithstanding any provision contained herein, the Board of Directors shall reserve the right to refuse any

Application or to accept any Application in full or part.

3.10.10 Submission of Applications

Application Form properly lled in accordance with the instructions thereof, along with the applicable

remittance for full amount payable on application should be enclosed in a sealed envelope marked “HVA

Foods Limited – Initial Public Oering” on the top left-hand corner and be addressed and dispatched by post

or courier or delivered by hand to the Registrars to the Oering at the following address.

P W Corporate Secretarial (Pvt) Ltd

3/17, Kynsey Road,

Colombo 08

Applications may also be handed over to the Managers to the Oering, the Bankers to the Oering and its

designated branches, members and trading members of the CSE as set out in Annexure C prior to 4.30 p.m.

local time on the Closure Date.

In the case of Applications dispatched by courier or post, such Applications should reach the Registrars to the

Oering prior to 4.30 p.m. local time on the Market Day immediately following the Closure Date. AnyApplications received after the above deadline shall be rejected even though the courier or post mark is dated

prior to the Closure Date.

3.11 Payment o Application Monies

3.11.1 Mode of Remittance

Payment should be made separately in respect of each Application by way of a cheque or bank draft or bank

guarantee. Remittances on Applications will be deposited in a separate bank account in the name of “HVA

Foods Limited – Initial Public Oering”.

Payment for Applications for values up to Rupees One Hundred Million (LKR 100,000,000/-) could be supportedby a cheque or bank draft or bank guarantee. Payment for Applications above and inclusive of Rupees One

Hundred Million (LKR 100,000,000/-) should only be accompanied by a bank guarantee.






• The intermediary may open a SIA, on the investor’s behalf. In conjunction with the SIA, an account

with the CDS must be opened.

• In respect of global, regional or country funds investing for the rst time in Sri Lanka, the intermediary

will facilitate the approval process regulated by the SEC.

• Payment for shares should be made through a cheque or bank draft or bank guarantee against the

funds in the SIA and made payable to “HVA Foods Limited – Initial Public Oering”.

• A foreign investor may invest through inward remittances of foreign currency held in a Foreign Currency

Banking Unit (FCBU) account of the Applicant maintained with any commercial bank in Sri Lanka. The

Applicant should forward the Application Form supported by a bank guarantee drawn on the Applicant’s

FCBU account pending allotment of shares.

• Upon allotment of shares, foreign currency to the extent of the Sri Lankan Rupee equivalent value

shares allotted would be called on the bank guarantee drawn on the Applicant’s FCBU account. The

requisite funds would then be credited to a SIA opened in favour of the Applicant via the aforementioned

FCBU account.

• This procedure would protect a prospective investor from any losses accruing due to uctuating

exchange rates.

• In addition to the payments made through SIA and FCBU mentioned above, a foreign citizen resident in

Sri Lanka under the Resident Guest Scheme may invest through the Resident Guest Foreign Currency

Account (RGFCA) maintained with any commercial bank in Sri Lanka. An investor who wishes to avail

him/herself of this facility should make the payment for shares through a bank draft or a bank guarantee

against the funds in the RGFCA and made payable to “HVA Foods Limited – Initial Public Oering”.

• Non-resident Sri Lankans can remit money for investment purposes in Sri Lankan

companies through Rupee Accounts for Non-Resident Sri Lankan Investment (RANSI)

maintained with authorized dealers.

• Sri Lankan citizens who have left the country to take up employment, business or a profession andcontinue to reside abroad and those citizens of Sri Lanka who have made their permanent place of

abode outside Sri Lanka are eligible to operate a RANSI with authorized dealers.

• Remittances by non-resident Sri Lankans in connection with this share Application Form must be

made via bank drafts purchased out of funds in the RANSI. There are no exchange control restrictions

on remittance of funds that may be available in a RANSI.

• Where a RANSI holder is also the holder of a Non-Resident Foreign Currency (NRFC) account, movement

of funds between a RANSI and a NRFC account of the account holder is freely permitted, so long as the

account holder continues to reside abroad and does not cease to be a citizen of Sri Lanka. Therefore,

funds in the NRFC account could be transferred to a RANSI through which investment in shares could

be made.

Cheques or bank drafts or bank guarantees should be endorsed by the issuing custodian bank, to the eect

that, such payment has been made against funds available in the individual’s SIA/FCBU/RGFCA account. The

endorsement must be clearly indicated on the cheque or bank draft or the bank guarantee. Alternatively, a

document detailing the endorsement could be submitted along with the payment and Application.

Bank drafts drawn on a RANSI account should also be endorsed in line with the above.

Applications supported by foreign currency remittances should be made in conformity with requisite

declarations accompanied by the documentation stipulated by the Controller of Exchange.




3.11.5 Restrictions Applicable to Foreign Citizens Resident in Sri Lanka

Foreign citizens resident in Sri Lanka may make payments through Sri Lankan Rupee accounts only if they

possess dual citizenship where one such citizenship is Sri Lankan. Foreign citizens having Sri Lankan citizenship

should attach a certied copy of the citizenship certicate with the Application Form.

Foreign citizens residing in Sri Lanka having valid residency visas should note that they cannot make

remittances via cheques or bank drafts or bank guarantees drawn on Sri Lanka Rupee accounts held in SriLanka but may do so via SIA/FCBU/RGFCA account as detailed in Section 3.11.4 above. Applications made by

foreign citizens not in accordance to the foregoing shall be rejected.

3.12 Banking o Payments

All cheques or bank drafts or bank guarantees received in respect of Applications will not be banked or called

on until the Market Day after the Closure Date of the subscription list, in terms of the CSE Listing Rules.

3.13 Returning o Monies o Rejected Applications

Where an Application Form is rejected, the cheque or bank draft or bank guarantee received in respect of the

Application will be returned via ordinary post at the risk of the Applicant. In the case of Joint Applicants,Application monies will be returned to the rst named Applicant.

Where the Application Form is accepted and the cheque or bank draft or bank guarantee is not honoured at

the rst presentation, the Application will also be rejected and the cheque or bank draft or bank guarantee will

be returned via ordinary post at the risk of the Applicant. In the case of Joint Applicants, Application monies

will be returned to the rst named Applicant.

3.14 The Basis o Allotment

The Oered Shares would be distributed among three broad investor categories, namely:

Employees * 5% of the Oered Shares

Retail 30% of the Oered Shares

Non-Retail 65% of the Oered Shares

* Permanent employees of HVA Foods Limited

Investors who apply for up to a maximum of 5,000 shares will be deemed as Retail investors for share allotment

purposes.

Investors who apply for shares in excess of 5,000 shares will be deemed as Non-Retail investors for share

allotment purposes.

The investor categories have been selected to ensure the broadest possible spread of shareholders whiletreating all Applicants in a fair manner.

In the case of an under subscription of any one or more categories relative to the allocation mix specied

above, the quantum of shares undersubscribed may be redistributed and allocated to the other categories

that may be oversubscribed. Decisions relating to the amount of any share redistribution and as to which

category would receive rst priority in selection for allocation of the under subscribed shares will be made at

the discretion of the Board of Directors of the Company. Such distribution would be made in a fair manner.

Redistribution shall not apply in the event of oversubscription of all three categories mentioned above.

In the event of an over subscription of any one or all categories mentioned above the basis of allotment willbe decided by the Board of Directors of the Company before the expiry of seven (07) market days from the

date of closure of the subscription list and immediately notied to the CSE.




3.15 Reunds on Applications

Where an Application is accepted only in part, the balance of the monies received on Application will be

refunded. Refunds on shares that have not been allotted will be refunded on or before the expiry of ten (10)

Market Days from the Closure Date (excluding Closure Date) as required by the CSE Listing Rules. Applicants

would be entitled to receive interest at the last quoted AWPLR published by the Central Bank of Sri Lanka plus

5%, on any refunds not made before the expiry of the above mentioned period.

Refunds via Sri Lanka Inter-bank Payment Systems:

• The refund payment will be made to the bank account specied by the Applicant through the Sri Lanka

Inter-bank Payment System (SLIPS) which is subject to a maximum limit of LKR 5 million, on or before the

expiry of ten (10) Market Days from the Closure Date (excluding Closure Date) as required by the CSE

Listing Rules and a payment advice shall be issued to the Applicant provided that the Applicant has

submitted accurate and complete details of his bank account in the Application Form. In the event the

refund payment is eected via SLIPS based on the bank account details provided by the Applicant in the

Application Form, but is rejected by the Applicant’s bank due to inaccurate or incomplete information,

such refund payments would be made via a crossed cheque in favour of the Applicant and sent by

ordinary post at the risk of the Applicant. In such instances, the Company together with the Registrars to

the Oering will send the refund cheques to such Applicants at the earliest possible and the Applicant

should not hold the Company or the Registrars to the Oering accountable for such delays.

Refunds via crossed cheque:

• If the Applicant has not provided details of the bank account in the Application Form or has provided

inaccurate or incomplete details of the bank account, the refund payment will be made by a crossed

cheque in favour of the Applicant and sent by ordinary post at the risk of the Applicant. In the case of a

Joint Application, a crossed cheque will be drawn in favour of the Applicant whose name appears rst in

the Application Form. Further, even if the Applicant has requested for SLIPS transfer for refund amounts

and submitted accurate and complete details of the bank account in the Application Form, refund amounts

exceeding LKR 5 million will also be made by a crossed cheque in favour of the Applicant and sent byordinary post at the risk of the Applicant.

A request cancellation of crossing on the refund cheque, in instances where the Applicant does not maintain

a current account, should be addressed to the Registrars to the Oering in writing, stating the cheque number

and the fact that the Applicant does not maintain a current account. The refund cheque and a clear photocopy

of the Applicant’s NIC should accompany the letter.

In the event of a cheque being delivered by hand by a third party to the Registrars to the Oering for

cancellation of crossing, a letter of authorization signed by the Applicant stating the NIC number of such third

party should also be presented with the cheque.

Cheques on which the crossing has been cancelled by the Registrars to the Oering should preferably be

collected in person or by a third party authorized by the Applicant. Where an Applicant has requested the

delivery of a cheque on which the crossing has been cancelled via post, the cheque will be sent at the risk of

the Applicant.




3.16 Successul Applicants and CDS Lodgement

The Securities & Exchange Commission of Sri Lanka has directed to mandate the lodging of share certicates

pertaining to all listed securities at the Central Depository Systems. Please note that upon the allotment of

shares under this Oer, THE ALLOTTED SHARES WOULD BE CREDITED TO THE APPLICANT’S CDS ACCOUNT. If

you wish to open a CDS account, you may do so through any one of the Members and Trading Members of the

CSE as set out in Annexure C or through any one of the Custodian Banks as set out in Annexure E.

Applicants have the option of having their shares ‘locked’* in the CDS. Shares that are locked*would not be

available for trading purposes and would not be visible to the participant. Such applicants would have to ll

in a separate section in the IPO Application Form for this purpose. If the applicant has not specied that his/her

shares need to be deposited to his/her ‘locked’* balance, please note that the said shares would be deposited to

applicant’s ‘trading’ balance.

The Oered Shares allotted will be directly uploaded to the respective CDS account given in the Application

Form before the expiry of eighteen (18) Market Days from the Closure Date of the Oering as required by the

CSE Listing Rules.

A written conrmation informing successful applicants on their allotment of shares will be dispatched notlater than ten (10) Market Days from the closure of the Issue.

Application Forms stating third party CDS accounts instead of their own CDS account numbers, except in the

case of margin trading accounts, will be rejected.

3.17 Transerability o Ofered Shares

Oered Shares shall not be transferable by the shareholders during the period between the date of allotment

of the Oered Shares and up to the date of listing (excluding the date of listing) of the Ordinary Shares of the

Company on the CSE.

3.18 Declaration to the Colombo Stock Exchange and Secondary Market Trading

The Company will submit to the CSE a declaration on the Market Day immediately following the day on which

investors’ CDS accounts are credited with securities. Trading of Ordinary Shares of the Company on the

secondary market will commence on or before the third (3rd) Market Day from the receipt of the declaration

by the CSE.




4.0 BUSINESS OPERATIONS OF HVA FOODS LIMITED

HVA Foods Limited was established in 1997 as a Board of Investment approved company under Section 17 (2)

of BOI Law No. 4 of 1978 dated September 04, 1997. It was specially set up to engage in export of value added

branded tea, tea extract based products, tea concentrate based products and a franchise operation. It is a fully

owned subsidiary of HVA Lanka Exports (Private) Limited which was established in 1990 as an exporting arm

of HVA International BV of Netherlands. Subsequently HVA Lanka Exports (Private) Limited became a completeSri Lankan business entity and started exporting tea in bulk form to establish its trade network and to develop

a client base.

Since its inception, HVA Group has won six Gold Awards as the Exporter of the Year in both traditional and

non-traditional exports from Sri Lanka. Identifying the need to create a tea brand with the uniqueness of its

origins, HVA Foods Limited created its own brand, “HELADIV” in 1996. “HELADIV” is derived from the word

“Heladiva” which symbolizes a home grown product range and a name that could easily be identied with

Ceylon tea. The “HELADIV” brand is registered in 42 countries around the world and has also been the pioneers

in developing Ready-To-Drink iced tea in the Sri Lankan market.

4.1 Group StructureHVA Foods Limited is a subsidiary of HVA Lanka Exports (Pvt.) Limited. The structure of the Company as at 30th

September 2010 is depicted below.

Figure 4-1: Group Structure

HVA Lanka Exports (Private) Limited is the parent company of HVA Foods Limited and is principally involved in

exporting of bulk tea.HVA Foods Limited – The Company is involved in manufacturing and exporting of value added tea and tea

extract based products.

HVA Holdings (Private) Limited – Owns the international brand rights of “HELADIV”.

4.2 Products Ofered

HVA Foods Limited is a leader in the manufacturing, marketing and distribution of four major product

categories; value added tea based products, tea extract based products, tea concentrate based products and

its franchise operations. There are about 80 products presently being marketed under the “HELADIV” brand

which includes a range of avours and presentations including black tea, green tea, herbal tea, specialty teas,

tea concentrate with pure tea extract, fruit base, and various other value added tea products.

HVA Lanka Exports (Pvt.) Limited

HVA Foods Limited

HVA Holdings (Private) Limited

100%

99.9999%




4.2.1 Value Added Tea Based Products

Some of the popular products oered under this category are given below.

HELADIV TEA SPECIAL (presented in eco-riendly packaging)

HELADIV Blue Fire

Select best Ceylon Black Tea blendedwith cornowers and rosehips giving aery blue tinge to the appearance.

The blend is enriched with naturalavours of kiwi, guava, passion fruit,spearmint and ginseng.

HELADIV Strawberry Delight

Ceylon black tea & freeze driedstrawberry avoured with cherry androse for an invigorating tea drink whenbrewed light.

HELADIV Tropical Magic

A wiry whole leaf tea blended withdried pineapple cubes and avouredwith the essence of the delicioussoursop fruit.

HELADIV Sunset Soother

Ceylon black tea mixed withindigenous Ranawara owers andavoured with nature identical vanilla,cinnamon, orange and almondavour.

HELADIV ZeusA truly magical blend of long leaf black tea, generously blended withsun-dried sunower strands andimpregnated with natural mangoavour

HELADIV PRIDE OF CEYLON

HELADIV Pride o Ceylon

Reaearch shows that Black Tea has health benetsequal to its green cousinand is currently the mostpopular tea around theworld.

HELADIV English Breakast

Ideal as a breakfast tea.




FLAVOURED TEA

HELADIV Strawberry

Combining the full andsucculent avour of sweetstrawberries with Ceylonblack tea

HELADIV Orange

Combining the fresh citrusavour of oranges andpremium Ceylon black tea

HELADIV Cherry

The premium Ceylon teaavoured with the deeprichness of summercherries, is a soothing drink for all seasons

HELADIV Peach

Black tea avoured withsweet peaches

HELADIV Rose

A beautiful blend of Ceylonblack tea scented with rosebuds for a fragrantlymemorable tea break anytime of the day

HELADIV Earl Grey

Premium black tea fromSri Lanka, avoured withoil of bergamot, a citrusfruit.

GOOD LIFE TEA INFUSION

HELADIV Slimming Tea

Slimming Tea contains ablend of dried Garcinia,Black tea and Earl Greyavour, producing adelicious brew.

HELADIV Long Lie Tea

Long Life Tea contains ablend of Gotukola andnature identical Mandarinavouring ingredients.Gotukola puries bloodand reduces nervousness.

HELADIV Winter Tea

An exquisite combinationof tea with corainder,ginger and peppercontaining essential oils tohelp ght coughs andcolds

HELADIV Anti-Stress Tea

A blend of dried gotukolaleaves (Centella Asiatica),Ceylon green tea andnatural lemon avour




HERBAL INFUSION

HELADIV Ginger

Heladiv introduces naturalherbal remedies in a rangeof popular herbs. Availablein easy to brew tea bags,the herbal infusions areinvigorating and soothesthe body.

HELADIV Rosehip

A blend of the rosehipower and hibiscus petalsproviding a fragrant anddelicious cup of tea. It is avibrant drink with lots of healing power due to itsanti-aging properties.

HELADIV Peppermint

Refreshing,invigoratingherbal drink, ideal calmingthe digestive system andrelieving symptoms of heart burn, stomach ache

and nausea.

GREEN TEA

HELADIV Pure Ceylon

Green Tea

Green tea is widely enjoyednot only for medicinal

eects, but also for themany dimensions of avour that can beexperienced through thedierent varieties.

HELADIV Pure Ceylon

Green Tea with

Lemon avour

Ceylon Green Tea with the

delicate avours of lemonand lime, makes a light andrefreshing drink that ispopular both hot and iced.

HELADIV Pure Ceylon

Green Tea with

Graperuit avour

An exotic blend of CeylonGreen Tea and grapefruit

avour is a refreshingbeverage with the delicatetang of grapefruit.

HELADIV Pure Ceylon

Green Tea with

Mandarin avour

Green tea from Ceylon withthe delicate avour of

mandarin is a deliciousunion of great taste andproven health benets,which makes a light andrefreshing drink that ispopular both hot and iced.




SUMMER FLOWERS

HELADIV Ruhunu OP

Tightly rolled whole leaf tea which gives a delicatetaste when brewed.Orange Pekoe is easy tobrew and produces abright and brisk beveragewhich tastes best whenconsumed with a dash of sugar and lemon oat. Thisis also ideal for home madeiced tea.

HELADIV Sparkling FBOP

Tightly rolled cut leaf of theOrange Pekoe type with aliberal mix of sparkling tips.Unopened ends of the teabuds are converted to tipsduring manufacture.

HELADIV Classic GP

Heladiv Premium Gun

Powder is the Green Teaversion of Super Pekoe.Ceylon Gun Powder ismuch sought after becauseit is ecologically purecompared to many similarproducts from otherorigins.

PAPER TUBES

HELADIVGreen Tea Peach

Pure Ceylon Green TeaPekoe is blended withdelicious peach fruit.

HELADIVStrawberry and Tea

The European special, thered strawberry gives avourto the black and green tea

HELADIV

Mango Flavoured

The luscious tropicalmango is the dominantcharacter of this specialblend.

HELADIV

Blue Fire Tea

The ingredients containedin this blend will invigorateyou and re the dormantpowers within your soul.




4.2.2 Tea Extract Based Products

As a result of the Company’s continuous eort for diversication, it has now identied “Ready-To-Drink” iced tea as part

of its product portfolio. This product has already been introduced to the local and international markets like Maldives,

Australia, USA and New Zealand under the “HELADIV” brand name.

As a result, the Company has built a special plant called the “HELADIV Innovative Centre”, for the manufacturing of its

iced tea. At this plant, tea is extracted from tea bers or BM (Broken Mix) Fannings through a hygienic process by usingmodern technology. The extracted tea essence is further processed into a range of Ready-To-Drink Ice Teas. The non-

soluble tea from this process is being tested for development of applications in the Pharmaceutical, Beauty Care and

Hospitality industries. The residue or “Spent leaf” rich in plant nutrients, is being tested as a rooting medium for plant

nurseries.

“HELADIV” Ready-To-Drink Ice Tea has been in the local and selected international markets for several years. This

product is fortied with real fruit extract and is a preferred drink amongst the younger generation. With the pilot plant

being upgraded to a commercial platform, post IPO, extensive worldwide marketing of the product will be undertaken.

Moreover, negotiations have been successful with one of the leading local airlines to serve “HELADIV” Ice Tea on board.

Several local supermarkets also carry the product. A strategically designed on-ground marketing and sampling eort

of the product has conrmed the acceptability amongst potential consumers. It is the intention of the Company tolaunch an integrated campaign aimed at securing a share of the local and global non-carbonated soft drink market.

Once the pilot extraction plant is upgraded to a commercial level of operation, a capacity of approximately 5,000-7,000

litres of tea concentrate a month can be produced. The raw materials used for production is the abundantly available

BM Fannings. Currently, a production volume of approximately 40 million kilos of BM Fannings is generated per

annum. The monthly input of BM Fannings in the new plant will be approximately 20 metric tons. Products generated

from this process will relate to tea concentrates sucient to manufacture 100,000 litres of Ice Tea, 20 metric tons of

nursery material and approximately 1,000 litres of concentrated tea compounds for other industrial applications.

It is expected at the rst nancial year of commercial operation beginning 1st April 2011 the Company will have a

marketable value for extract based products amounting to approximately LKR 100 million per annum.

ICE TEA

Strawberry Ice Tea

Pure Ceylon Tea, Strawberry and Apple Concentrate, CitricAcid, Caramel, Ascorbic Acid, Sugar, Water, Natural andNature Identical Flavours, Sodium Benzoate (E211) andPotassium Sorbate (E202) to Preserve Freshness

Apple Ice Tea

Pure Ceylon Tea, Apple Concentrate, Citric Acid, AscorbicAcid, Sugar, Water, Natural and Nature Identical Flavours,Sodium Benzoate (E211) and Potassium Sorbate (E202) toPreserve Freshness

Lemon Ice Tea

Pure Ceylon Tea, Lemon and Apple Concentrate, CitricAcid, Caramel, Ascorbic Acid, Sugar, Water, Natural andNature Identical Flavours, Sodium Benzoate (E211) andPotassium Sorbate (E202) to Preserve Freshness




4.2.3 Tea Concentrate Based Products

HVA Foods Limited has also ventured into tea cosmetics and pharmaceutical products which include skin care,

oral care, body care, facial care, food grade dye and tea tablets. These innovative products are expected to be

marketed in Japan, Singapore, Russia and in Central America.

SKIN CARE - The Company produces tea bath products in individually sealed envelopes

each containing a nylon bag with green tea and natural herbs.

Ingredients: Ceylon Green Tea, Sandalwood, Iramasu, Weniwal, Jasmine Flowers

Health benets: Designed to treat the skin or deliver the herbs through skin absorption. The heat of the water releases the fragrance and activates the properties of the herbs,while opening the pores of your skin. The inhaled scent passes through the nervoussystem to the brain, while the properties absorbed through the skin passes in to theblood stream.

ORAL CARE – Made from green tea extract and is safe for daily use even by children dueto the absence of alcohol.

Ingredients: Ceylon green tea extract, Sorbitol, Glycerin Sodium benzoate, Flavours,Water

Health benets: Designed to help prevent tooth decay. “HELADIV” mouth wash isanti-bacterial, anti-cavity, anti-gingivits, anti plaque and contains antioxidants whilstacting as a breath freshener.

BODY CARE – “HELADIV” green tea body gel is a unique and extraordinary formula inwhich a blend of pure Ceylon green tea extract and natural ingredients are combined.

Ingredients: Ceylon green tea extract, SLES 70%m Glycerin, Sodium amphora acitate,Parabance, Frangrances, De-ionized water

Health benets: Powerful antioxidant, thereby reducing free radical damage of the skin.It is also a potent anti-inammatory agent, thereby reducing inammation in the skin. Italso has an inhibitory action on collagens and enzymetic action in the skin where thecollagen is broken down resulting in more rm and elastic skin.

FACIAL CARE – A concentrated facial mask that could be used weekly to enhance andmaintain the skin.

Ingredients: Diatomaceous Earth, Alginate, Calcium Sulfate, Tetra sodium pyrophosphatewith extracts of Green tea, Weniwal, Gotukola

Health benets: The combination of tea and herbal extracts with nely ground mineralsboost the complexion of the skin and reduce signs of aging and improve blood circulation.

FOOD GRADE DYE – This is used in the confectionery industry as a colouring agent.Alternatively, tea waste is a valuable product used in several industrial extract includinghenna dye. It is a safe and cost-eective option in handling food products.

Ingredients: Tea waste

TEA TABLET – The tea extract oers a convenient way to get the benets of tea in highlyconcentrated tablet form. It is considered to be a potent antioxidant. This is intended toprepare a cup of tea within seconds. Tablets can be chewed as-is or added to a cup of hot or cold water. Especially the combat troops will nd the new product easy to carryand prepare.

Ingredients: Tea waste




4.2.4 Franchise Operation

Apart from the “HELADIV” brand, the Company has also ventured into the Chinese market through a sub brand

called “INFINI-T”. INFINI-T is a sub brand owned by Lake Drive Holdings (Pvt.) Limited and its registration, locally

as well as internationally, is currently being processed. The prospects of developing an exclusive chain of tea

cafes was rst developed with a proposal put forward by a Chinese company, involved in diversied business

interests including tea plantations. On a fact nding mission in 2009, it was revealed that the Chinese

consumed around 900 million kg of tea per annum mainly comprising of green tea varieties. One particularchain of shops in China has over 1,000 outlets spread throughout the country, and known to be generating

over a billion dollars of revenue per annum. Hence, it was decided to use China as the test market for the

franchise operation by giving the Chinese consumer a unique product in tea under the “Pure Ceylon tea”

concept.

In July 2009, the rst three franchise shops were opened in Quanzhou, Jinjiang in the province of Fujian and in

Beijing.

During the past one year the number of shops in China has increased to 10. All the shops in China carry pure

Ceylon tea packed in Sri Lanka or in China under the franchise rights of HVA Foods Limited. This operation in

China under the style and name Beijing Pure Ceylon Tea Company Ltd as per the MoU signed on 24th February2009, has undertaken investment in expanding the number of shops to 100 within 3 years. There are no other

parties to the MoU and it authorizes Beijing Ceylon Tea Company Ltd. to use the INFINI-T logo and the HVA

Group logo for products manufactured by the company within the Chinese geographical territory and brand

promotional activities carried out within the said territory. The operation at present centers around selling

exquisite gift teas and top of the range specialty teas to auent Chinese consumers who look for high quality

branded products which are palatable in terms of traditional tastes.

In addition, regular participation at exhibitions and food shows is undertaken by the Beijing Pure Ceylon Tea

Company Ltd to promote the goodness and uniqueness of pure Ceylon tea. The value of investment by the

Chinese party is estimated to be around USD 5 million within the last one year.

Stemming from the experience of the Chinese franchise shops, a new strategy will be put in place to introduce

tea franchise shops under the sub brand INFINI-T in selected markets around the globe. This process will be

initiated in 2011 and the company hopes to enjoy a moderate nancial benet in the rst year of operation by

targeting to establish a minimum of 10 shops other than for those already established in China and earmarked

to be set in Sri Lanka and elsewhere.

4.2.5 Revenue Breakup of the Products Oered

Given below is a breakup of total revenue based on the four main product categories and based on the

dierent geographical markets.

Chart 4-1: Break up o Total Revenue based on Product Category

Value added tea products...................99.63%

Tea extract based products......................... 0%

Tea concentrate based products........0.35%

Franchise Operations ................................0.01%

99.63%

0.01%0.35%




Even though almost all revenue is from value added tea products, the Company expects a change in the

future as its new product categories will be marketed in new markets. So far mostly black tea has been

exported under the franchise operations and the Company plans to export more of value added tea beginning

2011.

Chart 4-2: Break up o Total Revenue based on Geographical Market

4.3 Markets

For more than 15 years, “HELADIV”’s reputation and distinctive image have consistently developed across an

expanding number of products, brands and international markets. The “HELADIV” brand is registered in 42

countries with over 250 retail chains in the CIS, Far Eastern and the European markets and is in the process of

expanding into other markets as well. In its latest foray into exclusive foreign markets, the Company has also

set up a chain of exclusive tea shops in China with expansion potential to increase the branches to 100 within

three years.

Figure 4-2: Market Concentration

ASIA/FAR EAST USA/CANADA CIS EUROPEChina Canada Russia GermanyJapan USA Ukraine United KingdomMalaysia Barbados Latvia BelarusSingapore Jamaica Lithuania Taiwan St. Lucia Thailand St. VincentHong Kong TrinidadSouth Korea BelizePhilippinesMaldivesKazakhstan

Australia

New Zealand

Far East..................................................................18%

Middle East............................................................0%

USA, Canada.........................................................4%

CIS Countries..................................................... 68%

Europe.................................................................. 10%

4.00%

18.00%10.00%

68.00%




Chart 4-3: Export Market Concentration based on Export Quantity

As shown above, the Company’s bulk of the exports are to the Russian Federation and other CIS countries.

CIS Region

“HELADIV” branded products are distributed within this region in Russia, Ukraine, Latvia, and Lithuania.

Currently, exports to Russia make up the major portion of “HELADIV” export revenue which stands close to

USD 300,000 per month. The tea market in Russia is dominated by Russian tea brands that come under ORIMI

Group, May Tea Group, SAPSAN Tea Company, Ahmed brand and Unilever brands of Lipton and Beseda which

together control close to 65%-70% of the Russian tea market. The remainder is spread among approximately

70 other brands, which also include “HELADIV”.

According to Euromonitor, the total Russian market for tea is expected to grow by a CAGR of 3% over the next

three years.

Table 4-1: Forecast of Total Sales Volumes for the Russian Market

2010 2011 2012

Tea sales (million kg) 199.3 205.3 211.3

Growth (%) 3% 3% 3%

Source: Euromonitor International Reports

They also expect the consumption of Tea Bags and Specialty Tea to grow as well. Therefore, all the leading

companies are focusing on either production of tea bags or specialty tea categories. Moreover, Russian

consumers prefer to purchase well-known brands due to their perceived high quality. HVA Foods Limited has

maintained long standing relationships within the Russian market which span over two decades. Hence, this

has helped the Company in gaining recognition for its “HELADIV” brand among Russia’s quality conscious

consumers.

Historically, the Russian Federation and other CIS countries have accounted for over 80% of “HELADIV”s

revenues.

Table 4-2: CIS and Russian Federation: Historical Movement of Values and Volumes Exported

CIS and Russian Federation 2005 2006 2007 2008 2009

Value (USD) 731,350 1,278,170 1,740,060 1,366,819 2,040,424

Volume (kg) 168,578 266,499 262,929 196,895 275,792

Source: HVA Foods Limited

Far East ............................................................16.00%Canada / U.S.A...............................................3.00%

CIS......................................................................64.00%

Europe............................................................17.00%

3.00%

Source : HVA Foods Limited

16.00%17.00%

64.00%




In 2009, the CIS and Russian Federation accounted for 81% of total “HELADIV” tea sales and 86% of total

“HELADIV” volumes exported. Signicant growth had been experienced within this region with export

revenue recording a CAGR of 29.2% over the 5 year period from 2005-2009.

Chart 4-4: Historical Volume Movement - CIS and Russia

A detailed country wise break up of export volumes is provided in the above chart. As can be observed, Russia

takes the forefront, with other countries within the region remaining comparatively insignicant. For example,

in 2009, a signicant 83% of total exports to this region comprised of exports to Russia.

The forecasted revenue and exported volumes from 2010 to 2014 for the CIS and Russian Federation are

presented below.

Table 4-3: CIS and Russian Federation: Forecasted Movement of Values and Volumes Exported

CIS and Russian Federation 2010 2011 2012 2013 2014

Value (USD) 2,085,000 2,256,000 2,368,000 2,547,000 2,728,000

Average Rate (USD) 6.45 6.45 6.45 6.45 6.45

Volume (kg) 323,007 349,538 366,965 395,063 423,189


As per the forecast, the gross projected revenue from this region is expected to witness a moderate CAGR of

7.03% over the next ve years. It should be noted that a price rate increase has not been incorporated within

the individual markets of the region over the forecasted period. Thus with the export mix remaining fairly

constant over the projection period; the growth in revenue from 2010-2014 denotes that represented by an

increase in export volumes.

According to the management, the CIS and Russian Federation region is presently saturated with many brands

leading to increased competition. Many leading brands within these markets use multi origin teas to average

their tea prices on nal blends used for value added products. Furthermore, in Russia presently, duty on bulk

tea imports stand at 0%, whilst the duty on value added tea stands at 20%. Thus with such a disparity in duty

rates, more and more companies are shifting from importing value added tea to importing bulk tea and also

setting up plants in Russia itself to cut down on their packaging costs. However, with Russia entering the

World Trade Organization (WTO), the tari rates could ease in the future.

Russia

Ukraine

Latvia

Lithuania


2007

V o l u m e ( k g )

2008 20090

5,0000

10,0000

15,0000

20,0000

25,0000

30,0000

35,0000

40,0000




Far Eastern Region

“HELADIV” brand is currently distributed in Japan, Singapore, Thailand, Malaysia, Philippines, China and Taiwan.

Japan is presently the largest market for “HELADIV” products within this region. The Japanese tea industry

remains fragmented, with many players, of which brands such as Itno En and Nittoh remain market leaders

holding close to 20% market share. The remainder is split across a large number of players including Lipton,

Fukuju En, Harada, Twinnings and House of Foods. Thus “HELADIV” market share in Japan remains modest.

According to the Euromonitor International Report on Hot Drinks Market, tea in Japan is a mature and saturatedsector, with consumer demand mainly stemming from the fruit/herbal tea category, which is gaining further

recognition among tea drinkers. Especially the younger generation is increasingly shifting away from hot tea

towards RTD tea, creating markets for innovative brands such as “HELADIV”. The report projects a total volume

growth of 1% for the Japanese market.

The Far Eastern region is a growing market for “HELADIV” products, and according to the management,

consumers within this region are generally less price conscious and appreciate a wider product range and

innovative tea products.

Table 4-4: Far Eastern Region: Historical Movement of Values and Volumes Exported

Far Eastern Region 2005 2006 2007 2008 2009

Value (USD) 184,600 248,224 301,652 392,832 446,875

Volume (kg) 17,497 26,762 31,243 38,420 40,372


Both volumes and value of exports to this region have witnessed a continuous growth over the past several

years. In terms of revenue from this region, a CAGR of 24.7% had been achieved from 2005-2009.

Chart 4-5: Historical Volume Movement - Far Eastern Region

As shown in the above graph, Japan is the largest export market for “HELADIV” products in the Far Eastern

region and on average has accounted for 75% of the total volumes exported to the region over the past

several years. With regard to Japan, the Company directly sells to a supermarket chain which provides for the

comparatively high volumes exported. The signicance of Japan has however declined from 2005, where it

accounted for 83% of total Far Eastern export volumes to 45% in 2009 as other markets like China have shown

promise. The Chinese market has experienced a signicant 49% growth in volumes from 2005 to 2009.

According to the management, Japan and Singapore are considered as premium markets, with consumers

willing to pay a premium price for the “HELADIV” product range. With China’s economy growing and disposable

income levels rising, China too is expected to become a premium market, with discerning consumers willing

to pay higher for quality.

The forecasted revenue and export volumes for the Far Eastern region from 2010 to 2014 are presented below.

China

Japan

Malaysia

Singapore

Taiwan

Thailand

Australia

Philippine


2007

V o l u m e ( k g )

2008 20090

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000




Table 4-5: Far Eastern Region: Forecasted Movement of Values and Volumes Exported

Far Eastern region 2010 2011 2012 2013 2014

Value (USD) 515,000 577,500 628,500 702,000 810,000

Average Rate (USD) 6.98 6.84 6.70 6.44 6.31

Volume (kg) 73,824 84,485 93,794 109,059 128,382


With increased interest in the Chinese market, HVA Foods Limited is expected to adjust their export mix in this

region accordingly. Given below is a forecast provided by the Company.

Table 4-6: Far Eastern Region: Forecasted Export Mix

2010 2011 2012 2013 2014

China 34.0% 37.0% 40.0% 45.8% 48.7%

Japan 54.0% 50.1% 45.8% 40.5% 36.7%

Philippines 1.0% 1.0% 1.3% 1.3% 1.4%

Singapore 2.0% 2.5% 2.5% 2.7% 2.7% Taiwan 1.0% 1.0% 1.1% 1.1% 1.4%

Thailand 8.0% 8.4% 9.4% 8.6% 9.2%

100.0% 100.0% 100.0% 100.0% 100.0%


As seen above, the signicance of Japan in terms of volumes sold within the region is expected to decline with

the Chinese market increasing in signicance over the projected period. Japan’s share of export volumes to

the Far Eastern region is expected to fall to 37% in 2014. The decline in signicance comes amid a modest

growth being projected for the Japanese market.

Revenue from the overall Far Eastern region is expected to grow by a CAGR of 12% over the forecast period,

on the back of export volumes increasing by a CAGR of 14.8%.

Table 4 -7: Cumulative Export Values, Volumes, and Average Price Comparison 2009 vs. Forecasted for 2010

Far Eastern region 2009 2010

Value

(USD)

Volume

(kg)

Avg. Price

(USD)

Value

(USD)

Volume

(kg)

Avg. Price

(USD)

China 67,331 4,750 14.18 100,000 25,000 4.00

Japan 338,183 30,609 11.05 340,000 40,000 8.50

Philippines - - - 5,000 588 8.50Singapore 13,929 1,179 11.81 15,000 1,765 8.50

Taiwan 3,599 405 8.89 5,000 588 8.50

Thailand 23,832 3,429 6.95 50,000 5,882 8.50

Total 446,874 40,372 11.07 515,000 73,823 6.98


A comparison of forecasted price rates for 2010 for the Far Eastern region, with those achieved in 2009, indicate

that the rates projected for 2010 are signicantly lower, especially with regard to China. Overall average prices

within the Far Eastern region are expected to fall by 37% in 2010, with average price rates in China alone

expected to decline by a notable 72%.

With China being a tea producing country, presently there are many established brands within the country

which leads to heavy competition being faced by companies like HVA Foods Limited in increasing market




share. Even though “HELADIV” branded products have been in the Chinese market for some time, it has been

recognized that the Company had not been able to identify the right partners to enter the Chinese market on

a larger scale. According to the management, since 2008 they have identied two parties with strong nancial

and marketing backgrounds to drive the brand in China. One party is concentrating in Retail & Horeca markets

(a sector of the food service industry, which includes establishments which prepare and serve food and

beverages) in Shanghai, Beijing, Nanjing. The other party is investing in its own specialty tea shops as well as

promoting “HELADIV” on large scale to retail markets in the southern part of China. Their projects are expectedto boost sales during the coming years, primarily focusing on the “HELADIV” tea bag range. With the

management anticipating to grow the retail Chinese market and capitalize on product availability and brand

awareness, the comparatively lower rates projected are primarily due to a penetration strategy adopted to

actively capture the market. Export volumes to China are forecasted to record a CAGR of 26% over the period

from 2010-2014.

The Company has introduced “HELADIV” products to the Philippines market in 2007. By 2008, the presence of

“HELADIV” products had increased with the Company shipping approximately USD 50,000 worth of “HELADIV”

products per quarter to the Philippines. However in 2009, with increased competition from international

brands, in particular Twinings of London, the Company had lost signicant market share. Twining presently is

the most popular brand in Philippines dominating almost 40% of the retail shelves in terms of importedbrands. In 2010 and going forward, the Company intends to re-energize marketing eorts to recapture the

Philippines market. The Company has planned to participate in trade fairs which should provide opportunities

for the Company to identify new distributors and modes to expand its market share.

Middle Eastern Region

HVA Group is mainly involved in exporting tea in bulk to this region. The main markets are Syria, Iran, Lebanon,

UAE, and Iraq. However, “HELADIV” products are presently not exported to this region, where the market

appetite still appears to be for bulk and not value added tea products.

Europe and U.S.A.

This region consists of untapped markets for “HELADIV” products except for a minimal quantity that is shipped

under the “HELADIV” brand to Belize and United States via consolidators. In terms of competition, 70% of the

market consists of major brands such as Lipton, Twining, Tetly, Ahmad Tea, Harrods, Bigelow, Celestial Seasoning

and the rest with a range of small brands owned by leading tea producing nations. The Company has

approached SUPERVALU and COSCO which are the largest distribution channels in the U.S. According to the

management the requirement of warehousing and setting up a liaisons oce is presently being explored.

As can be observed from the table below, the presence of “HELADIV” products within this region has been

comparatively negligible though growing in signicance over 2008 and 2009.

Table 4-8: Europe, Americas and African Region: Historical Movement of Values and Volumes Exported

Europe, Americas and Arican Region 2005 2006 2007 2008 2009

Average Rate (USD) 1,680 - 1,386 31,590 29,112

Volume (kg) 65 - 50 2,477 3,327





Chart 4-6: Historical Volume Movement - Europe & Americas

As shown above, the European region has outperformed the American market and has achieved signicant

growth in 2009.

The forecasted revenue and volumes for the Europe and Americas region from 2010 to 2014 is presentedbelow.

Table 4-9: Europe, Americas and African Region: Forecasted Movement of Values and Volumes Exported

Europe, America, and Arica 2010 2011 2012 2013 2014

Export Value (USD) 28,850 37,500 45,250 53,500 70,500

Average Rate (USD) 5.01 4.92 4.84 4.79 4.74

Volume (kg) 5,754 7,625 9,354 11,167 14,875


Given below is a forecast of the export mix from 2010 – 2014.

Table 4-10: Europe, Americas and African Region: Forecasted Export Mix

2010 2011 2012 2013 2014

Europe 92% 94% 95% 95% 95%

U.S.A. 8% 6% 5% 5% 5%

100% 100% 100% 100% 100%


Revenue from this region is expected to witness a CAGR of 25% over 2010-2014. With average rates expected

to fall over the forecast period, the growth in revenue is mainly driven by an increase in export volumes from5,754kg in 2010 to 14,875 kg in 2014 (CAGR of 21%).

Table 4-11: Cumulative Export Values, Volumes, and Average Price Comparison 2009 vs. Forecasted for 2010

2009 2010

Value (USD) Volume

(kg)

Avg. Price

(USD)

Value (USD) Volume

(kg)

Avg. Price

(USD)

Europe 28,405 3,304 9.15 27,500 5,416 5.50

U.S.A. 708 22.5 31.47 1,350 338 4.00

Total 3,326.5 10,933


Europe

Americas


2007

V o l u m

e ( k g )

2008 20090

20,000

40,000

60,000

80,000

100,000

120,000

140,000






With regards to Maldives, the management is expecting to target the strong Horeca market. Thus with high

potential for the “HELADIV” Ice Tea range which will be channeled to mainly hotels, the Company has presently

initiated distribution with an identied distributor.

According to the management, at present Malaysia mostly consumes low grade tea dust with avours which

are imported as bulk tea and packed within the country. It is believed that considerable potential lies in

Malaysia for aordable quality avoured teas especially in the form of tea bags. Thus, the management initiallyanticipates to enter the Malaysian market primarily with a product assortment of avoured tea bags.

4.4 Competition

Given below is a table which shows the top ten value added tea exporters by volume.

Table 4-14: Top Ten Sri Lankan Exporters of Value Added Tea

Exporter Quantity % o Tea

Packets

% o Tea

Bags

% o

Blended Tea

% o Instant

Tea & Other

Akbar Brothers Group 24,687,305 83.3% 14.5% 2.0% 0.2%

Jaerjee Brothers Group 10,074,637 80.4% 11.3% 0.09% 5.1%CTM Group 7,792,804 89.4% 2.5% 8.0% 0.02%

Expolanka Teas 6,796,480 94.4% 4.5% 0.05% 1.0%

Union Commodities 6,492,146 27.9% 2.6% 69.4% 0.09%

MJF Group 5,483,989 27.0% 61.9% 0.07% 11.0%

Stassen Group 4,769,048 85.1% 10.6% 1.5% 2.7%

James Finlay Group 4,258,959 92.9% 7.1% - -

Imperial Tea Exports 4,253,045 90.8% 4.9% 2.8% 1.5%

Sunshine Tea 2,761,337 35.1% 11.9% 52.9% 0.10%

Source: Tea Data Book – 2009

Compared to its competitors HVA Foods Limited has exported only 604,472 kg of value added tea. Given

below is the breakup of sales based on the product line.

Chart 4:7- Break up o Sales based on Product Line

Tea Packets...................................................58.00%

Tea Bags.........................................................20.00%

Other...............................................................22.00%

58.00%

20.00%

22.00%




However, it should be noted that most of these companies mentioned above have been operating in the

trade for a long time. Moreover, most competitors in value added tea segment are packing for third party

brands while HVA Foods Limited packs its entire production quantity under their own brand. What should be

highlighted is that while the export volume of value added tea in the industry declined by 9.4% the Company’s

volume has increased by a signicant 18%. It is expected that the outlook for the Company will be better in

the future with the introduction of new products and markets.

4.5 Degree o Dependence on Key Customers and Suppliers

“Aroomat”, a distribution company based in Moscow, Russia accounts for approximately 35% of the total sales

of “HELADIV” products. The balance sales revenue is being distributed among a diversied client base.

4.6 Details o Material Indebtedness

The details of Term Loans of HVA Foods Limited as at 03rd January 2011 are as follows.

Table 4-15: Loan Facilities – HVA Foods Limited

Name o Bank Facility Value o

Facility

Outstanding

as at

03/01/2011

Amount

repayable

within 01 Year

Amount

Repayable

Ater 01 Year

Seylan Bank (1) Term Loan

– USD

1,170,000 1,000,000 770,000 300,000

Bank of Ceylon Term Loan

– LKR

10,000,000 10,000,000 10,000,000 Settle

through IPO

proceeds

Seylan Bank Overdraft 5,000,000

Bank of Ceylon Overdraft 4,000,000

Lease Facility

Mercantile Investments

Limited

Working

Capital

5,000,000 - 625,000 4,375,000

Related Party Loans (2)

Mrs. V.S. Amunugama

Fernando

6,935,878 3,467,939 3,467,939

Mr. A.R.H. Fernando 2,000,000 2,000,000 -

Lake Drive Holdings (Pvt.)

Limited

4,640,406 2,320,203 2,320,203

Short Term Borrowings (2)Packing Credit Loan

Bank of Ceylon USD 170,176 170,176

Seylan Bank USD 208,089 208,089

HSBC USD 210,460 210,460

Bills Negotiation

Bank of Ceylon USD 301,061 301,061

Seylan Bank USD 811,355 811,355

HSBC USD 39,525 39,525

* Note: The Company has applied for a loan facility of LKR 10 Mn from Bank of Ceylon which was pending at the time of printing of this

Prospectus. However, provided the loan being granted, the Company expects to settle it through the IPO proceeds




(1) The Company expects to settle only a portion of the Seylan Bank loan. Please refer Section 3.5 (ii) for

settlement amount.

(2) All related party loans and remaining short term borrowings after settlement through IPO, will be settled

through internally generated funds.

Please refer Note 28 of the audited nancial statements for the year ended 31st March 2010 for information

regarding loan facilities that have been rescheduled by banks.

Also note that the borrowing costs are recognized as an expense in the period in which they are incurred,

except to the extent where borrowing costs that are directly attributable to the acquisition, construction, or

production of an asset that takes a substantial period of time to get ready for its intended use or sale, are

capitalized as part of that asset.

As at 03rd January 2011 there were no mortgages or charges on the assets of the Company other than the

mortgages and charges disclosed under Note 21 to the audited nancial statements of HVA Foods Limited set

out in this Prospectus.

4.7 Working Capital

The Board is of the opinion that the working capital is sucient for the purpose of carrying out day to day

operations of the Company. However, for future business expansions, the Company intends to utilize a part of

the proceeds of the Oering contemplated herein as set out in Section 3.5

4.8 Dividend Policy

The Company has not paid any dividends on its Ordinary Shares in the past as the Company has incurred

losses during its initial years of operation. However, in view of a turnaround in protability the Company

intends to pay dividend going forward.

4.9 Litigation, disputes and contingent liabilities

There are no material legal, arbitration or mediation proceedings pending against the Company as at 30th

September 2010 that would materially aect the current nancial position or future operations or prots of

the Company.

The Company was not involved in any legal, arbitration or mediation proceedings in the recent past which

had any signicant eects on the Company’s nancial position or protability.

As at 30th September 2010, there are no penalties imposed by any regulatory or state authority against the

Company.

The following contingent liabilities exist on behalf of the following company as at 31st March 2010.

Company Name Bank Guarantee Amount (LKR)

*HVA Lanka Exports (Private) Limited Lankaputhra

Development Bank

Primary mortgage 130.0 Mn

HVA Lanka Exports (Private) Limited HSBC Corporate guarantee 26.9 Mn

HVA Lanka Exports (Private) Limited HSBC Issuance of guarantee 0.5 Mn

* The land and factory building that have been pledged against the Lankaputhra Development Bank are shown as an asset on the books

of HVA Foods Limited while the loan component is shown as a liability on the books of HVA Lanka Exports (Private) Limited. However,

it should be noted that the land and the building are being used on a shared basis by both HVA Foods Limited as well as HVA

LankaExports (Private) Limited and the funds from the loan proceeds have been applied for improvement of such shared facilities.




4.10 Patents, Trade marks and Brands Owned by the Company

HVA Foods Limited has the local brand rights for its brand “HELADIV” while HVA Holdings (Private) Limited; now

a 100% owned subsidiary of HVA Foods Limited has the international brand rights. Internationally, the brand

name has been registered in 42 countries. Furthermore, the Company is also expecting approval for its sub-

brand “INFINI-T” in the near future.

4.11 Share Transer o HVA Holdings (Private) Limited to HVA Foods Limited

The international brand rights of the “HELADIV” brand is owned by HVA Holdings (Private) Limited which was

a fully owned subsidiary of Lake Drive Holdings (Private) Limited. A Board resolution was passed on 29th

September 2010 by HVA Foods Limited to transfer Eighteen Thousand Three Hundred and Sixty Seven (18,367)

ordinary shares held by Lake Drive Holdings (Private) Limited to HVA Foods Limited. A Share Sale and Purchase

Agreement was entered into by the two parties on the 29th September 2010 and as per the agreement a sum

of Sri Lankan Rupees Forty Five Million (LKR 45,000,000) in consideration of the transfer will be paid on or

before 31st January 2011. Hence, HVA Holdings (Private) Limited is now a fully owned subsidiary of HVA Foods

Limited.

HVA Holdings (Private) Limited has the international ownership rights of the “HELADIV” brand. It has no otherbusiness operations, assets or liabilities.

Given below is the ownership structure of HVA Holdings (Private) Limited from incorporation to date.

Table 4-16: Ownership Structure of HVA Holdings (Private) Limited

No. o Shares

Mr. A.R.H. Fernando 01 -

Mrs. V.S. Amunugama Fernando 01 Transferred

Dothodana Jayantha Gunawardena 1,000 Transferred

Vallibel Holdings (Pvt.) Ltd. 9,368 TransferredHVA Lanka Exports (Pvt.) Ltd. 18,367 Transferred

Lake Drive Holdings (Pvt.) Ltd. 18,367 Transferred

HVA Foods Limited 18,367 -




5.0 TEA INDUSTRY

5.1 History

The origin of Sri Lanka’s tea industry dates back to the year 1824 with the rst tea plant brought to Ceylon by

the British from China. However, tea planting for commercial purposes began in 1867 when James Taylor

started the rst tea plantation in Kandy. Since then tea production has been increasing even further with the

then existing coee estates also being converted to tea plantations. By 1927, tea production in the countryexceeded 100,000 metric tons, which was almost entirely exported. By 1965, Sri Lanka became the world’s

largest tea exporter for the rst time.

During 1971–1972, the government of Sri Lanka nationalized the tea estates owned by the British companies

and the Sri Lanka Tea Board was founded to supervise these acquired estates. In 1976, Sri Lanka’s tea industry

marked a milestone with the commencement of exports of tea bags. Since then the Sri Lankan tea industry

has grown in strength to become a vital component of the economy.

5.2 Overview – Contribution to the Economy

The tea industry in Sri Lanka plays an important role in the Sri Lankan economy. It is one of the major sourcesof foreign exchange earnings and a top contributor to export earnings.

For the past several years, tea has been the third largest foreign exchange revenue earner behind garments &

textiles, and workers’ remittances.

Chart 5-1: Major Sources o Foreign Exchange Earnings

The industry has also been a key contributor to total export earnings. Tea exports accounted for 16.7% of

earnings in 2009 which was a 6.8% drop compared to 2008 mainly due to supply shortages.

Table 5-1: Contribution of the Tea Industry to Export Earnings

Share (%)

2005 12.8

2006 12.8

2007 13.2

2008 15.7

2009 16.7

Source: Central Bank of Sri Lanka Annual Report – 2009

Garments & Textiles

Workers' Remittances

Tea

Tourism

Source : Central Bank Annual Report - 2009

2005 2006 2007 2008 2009

U S D m i l l i o n

0

1,000

2,000

3,000

4,000




5.3 Overview – Sri Lanka Tea Production

Sri Lanka produces tea throughout the year and approximately 4% of the country’s land mass accounts for tea

plantations. The tea growing areas are mainly concentrated in the central highlands and southern inland

areas of the island. They are broadly grouped according to the elevations as high grown (above 1,200 meters),

medium grown (between 600 to 1,200 meters), and low grown (up to 600 meters). High grown teas from Sri

Lanka are reputed for their taste and aroma and are much sought after by blenders of tea importing countries.

The medium grown teas provide a thick colour variety which is popular in Australia, Europe, Japan and NorthAmerica. The teas produced in low grown areas are mainly popular in Western Asia, Middle Eastern and CIS

countries.

Tea planting is mainly done through private tea small holders and the Regional Plantation Companies. The

small holders account for approximately 37.33% of the total extent of land under tea cultivation while the

remainder is cultivated by the Plantation Companies.

Sri Lanka mainly produces orthodox teas (95%) while a small portion is produced through other methods. In

the orthodox process of production, semi dried green shoots are ruptured by rolling achieved from a rotary

movement. The rolling process ruptures and twists the leaves. When tea leaves are crushed an oxidation

process begins, which is followed by ring and commonly known black tea is produced. Unorthodoxproduction process mainly includes the production of CTC (cut, tear, curl) tea. The production process begins

by cutting the withered leaf into a uniform size by machines. Then the leaves are fed into metal rollers to be

crushed, torn and curled. The extracted cell cap is collected and added to the leaves again. The crushed

leaves are then oxidized, dried and sorted.

Sri Lanka was the fourth largest tea producer in the world producing 289.7 Mn kg in 2009.

Table 5-2: World’s Top Five Tea Producing Countries

Country 2006 (Mn kg) 2007 (Mn kg) 2008 (Mn kg) 2009 (Mn kg)

China 1,047.3 1,183.0 1,257.4 1,358.6India 928.0 949.2 805.2 978.9

Kenya 310.6 369.6 345.8 314.2

Sri Lanka 310.8 305.2 318.5 289.7

Vietnam 151.0 164.0 174.9 154.0

Source: International Tea Committee – Annual Bulletin of Statistics 2010

Last year recorded a 9% drop in Sri Lanka’s total tea production due to unfavourable weather conditions and

the work stoppages by estate workers.

Chart 5-2: Tea Production in Sri Lanka or the Past Decade

Source :Central Bank Annual Report - 2009

20 00 20 01 200 2 200 3 20 04 20 05 2006 200 7 2 008 2009

K g m i l l i o n

270

280

290

300

310

320

330




The decline in tea production in 2009 was felt not only by Sri Lanka but by many other tea producing countries

as well, which resulted in a drop of total world tea production by 2.2%. However, 2010 looks positive with

cumulative gures for July standing at 195.1 Mn kg compared to 158.1 Mn kg in 2009 recording a 23% increase.

This positive trend is expected to continue in the coming months as well, given good weather conditions and

stronger world tea prices. Moreover, according to International Tea Committee reports, the gap between

production of tea and consumption was 3.4% in favour of consumption for 2009. This is encouraging news

showing that demand for tea remained robust despite the global economic recession depicting thatconsumption of tea is habit forming and is relatively price inelastic.

Given below is a gure depicting the production process of black tea.

Figure 5-1: Production Process – Black Tea

The green leaf supplied by the plantation companies and the tea small holders are brought to the factories forprocessing and manufacturing of black tea. The nished product is then sold through the Colombo tea

auction to local and foreign buyers. Part of the tea is consumed locally while bulk of the production is shipped

to foreign countries by local and foreign owned export companies.

5.4 Tea Export Market

Sri Lanka is considered to be the world’s second largest exporter with almost 90% of its total production being

exported. Its export market is currently valued at approximately USD 1.5 Bn and has been able to maintain a

global export share of 20% - 21%.

Table 5-3: World’s Top Five Tea Exporting CountriesCountry 2006 (MT) 2007 (MT) 2008 (MT) 2009 (MT)

Kenya * 312,156 343,703 383,444 342,482

Sri Lanka 314,915 294,254 298,821 279,839

China 286,594 289,431 296,935 302,949

India * 215,672 175,454 200,070 189,000

Vietnam 105,116 110,929 104,000 95,000

* Includes teas imported and re-exported; includes Green Tea but excludes Instant Tea


Until recently Sri Lanka used to be the largest exporter in the world. However, in recent times Sri Lanka hasencountered competition in retaining its position as the main source of Orthodox Black Tea in the world.

Despite this, year 2010 looks positive with total export cumulative gure up to May showing a 7% increase

PRODUCTION MARKETING CONSUMPTION

Green leaf

suppliers(Plantation

Companies and

Small Holders)

State owned &

private tea

factories

Local & foreign

buyers

Local & foreign

consumers

Auction






Furthermore, SLTB grants the franchise rights of the Ceylon tea Lion logo which denotes not only the country

of origin but also the quality of Ceylon tea. The logo can only be used by tea packs which contain 100% pure

Ceylon tea. Sri Lanka Tea Board is the legitimate owner of the Ceylon tea Lion logo which has been registered

in many countries around the world.

5.6 Value Added Tea Exports

A few decades ago, Sri Lanka’s tea exports mainly consisted of black tea in the form of bulk tea. However, in1982, with the government incentive package granted to exporters, a shift from supplying of bulk tea to value

added packaged tea under exporters own brand names and/or buyer brand names was observed. These

incentives helped establish an infrastructure that assisted brand building and manufacture of value added tea.

Hence, today, Sri Lanka’s export prole is more diversied with the addition of value added tea segment which

includes tea packets, bags, instant tea and other blended teas.

Table 5-5: Volume of Sri Lankan Tea Exports

2006 2007 2008 2009

Volume

(Mn kg)

% Volume

(Mn kg)

% Volume

(Mn kg)

% Volume

(Mn kg)

%

Bulk Tea (Black & Green) 200.7 61.3 182.9 58.7 179.9 56.3 167.5 57.8

Value Added Tea 125.4 38.7 127.5 41.3 137.7 43.7 119.6 42.2

Total 326.1 310.4 317.6 287.1


More than 50% of Sri Lanka’s tea exports still consist of bulk tea which fetched an average price of USD 3.67

per kg in 2009, while the prices of tea exports in value added forms ranged higher, between USD 5.36-7.53 per

kg. However, Sri Lanka has recently beneted from well developed infrastructure facilities for value addition

which has placed Sri Lanka far ahead of all other producer countries. Hence, the Sri Lanka Tea Board is

expecting to increase the share of value added tea exports to 65% from current 40% - 42% levels within thenext ve years by assisting rms to market their brands overseas.

Given below is a chart showing the production process of value added tea.

Figure 5-2: Production Process – Value Added Tea

Upon purchase of teas from the auction and receiving the teas at the exporter’s warehouse, teas are blended

in an automated blending machine as per the blending instructions given by the tea department. During the

blending process, metal, bre particles and other foreign matter are extracted and the tea is sifted to maintain

uniformity in size of the product. If the teas are to be avoured, it is done in specially designed stainless steel

avouring drums. This process takes place within a conned area on the factory to avoid cross contamination

with other un-avoured teas. This nal blend of tea is then packed into various types of packaging to the liking

of the consumers. The nal packaging will be placed in master cartons to enable easy transport by sea or air.

Receiving of teas at thewarehouse

Blending Flavouring Packaging Shipping




Given below is a list of the top 10 tea importing countries.

Table 5-6: World’s Top Ten Tea Importing Countries

Country 2007 (MT) 2008 (MT) 2009 (MT)

Russian Federation & CIS Countries 246,372 257,260 259,630

United Kingdom 131,152 129,759 120,136

USA 109,396 116,749 110,861

Pakistan 106,366 99,116 85,655

Egypt 69,000 107,000 77,600

UAE 58,540 60,540 54,550

Morocco 52,500 48,200 53,700

Iran 56,100 61,600 50,500

Afghanistan 44,000 40,300 46,900

Iraq 32,000 39,500 43,800

Japan 47,303 43,107 40,222


As shown below, signicant increases in demand for value added tea on a global context is also expected. An

average YoY increase of 15% was observed in the segment of tea packets.

Chart 5-4: January-July 2009 Vs 2010 Tea Packet Imports

Furthermore, according to the United Kingdom Tea Council, 96% of all cups of tea consumed daily in the UK

is brewed from tea bags. The U.S. has also seen substantial growth in the consumption of value added tea.

Growth was strongest in RTD bottled teas, large sized tea bags for food service vendors and avoured andunavoured specialty blends. According to the U.S. Department of Commerce, 80% of tea consumption in the

U.S. consists of iced tea. The bulk of iced tea is brewed from tea bags which account for the largest share (65%)

of tea sales at the retail level while RTD tea, instant tea and iced tea mix consisted of 19%, 11% and 5%

respectively.

Further growth is seen in Sri Lanka’s largest export market for tea, Russia. The average annual per capita tea

consumption in Russia is 1 kg. Moreover, around 95% of the Russians drink tea and according to the Russian

Association of Tea & Coee, the consumption rate peaks during the winter season. During those times, half of

the population consumes two cups of tea on a daily basis. With regard to the consumption of value added

tea, Russia repeats the pattern of the European tea market. The share of tea bags in the Russian market

currently accounts for approximately 20% and it is expected to increase further with the increasing per capita

income and more discerning taste.

Source : Data One – Jan - July Data

S y r i a

R u s s i a

L i b y a

I r a q

J o r d a n

T u r k e y

I r a n

K u w a i t

U k r a i n

L e b a n o n

S a u d i

A r a b i a

M T

(1,000)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2009

2010




6.0 SRI LANKAN FAST MOVING CONSUMER GOODS INDUSTRY (FMCG)

An overview of the Fast Moving Consumer Goods (FMCG) industry is discussed in the sections below as the

Company is currently selling their tea extract based products to the local and export market. This product

category includes iced tea, body gel, mouth wash, tea bath, food grade dye and concentrated cordial.

The FMCG sector mainly focuses on manufacturing and marketing branded goods in the personal care, health

care, and food & beverages categories. The overall FMCG industry grew by 9% during 2009 to LKR 114 Bn

(Source: AC Nielsen, LMRB) while total private consumption grew by 0.6%. However, Private Consumption

Expenditure (PCE) as a percentage of GDP decreased to 64.3% from 70% in 2008 while PCE on food, beverages

and tobacco grew by 1.7%. Despite the slight decrease last year, the food, beverages and tobacco sector has

always been the highest contributor to total Private Consumption Expenditure.

Table 6-1: Composition of Private Consumption Expenditure at Current Market Prices

Share o Total PCE (%)

Item 2007 2008 2009

Food, Beverages, and Tobacco 41.0 37.8 38.2Clothing and Footwear 6.4 5.7 5.6

Housing, Water, Electricity, Gas 11.1 12.7 12.0

Furnishings, Household Equipment 6.2 5.8 5.9

Health 1.7 1.8 2.2

Transport 19.2 21.8 21.1

Leisure, Entertainment and Culture 3.6 3.6 2.9

Education 0.1 0.1 0.1

Hotels, Cafes, and Restaurants 1.6 1.5 1.5

Miscellaneous Goods and Services 4.2 4.9 5.5

Expenditure Abroad of Residents 8.9 7.7 8.1


As shown below, Sri Lanka has comparatively recorded higher consumption expenditure as a percentage of GDP.

Table 6-2: Comparative PCE Performance

2009 Sri Lanka India Singapore Malaysia

PCE as a percentage of GDP (%) 67.2 55.5 39.6 45.6

Source: Central Bank Annual Report - 2009

6.1 Drivers o Growth o the Sri Lankan FMCG Industry(1) Growth in consumption expenditure & increase in disposable income – Growth in GDP is the main driver

behind the increase in consumption expenditure and disposable income. Sri Lanka’s GDP per capita, at

market prices, has increased from USD 981 in 2003 to USD 2,053 in 2009.




Chart 6-1: Per Capita GDP at market prices (USD)

For 2010, the Central Bank is projecting a 7% GDP growth due to positive eects on the economy after the end

of the 30 year insurgency. This would assist in having an even more positive impact on consumer expenditure.

Chart 6-2: GDP (percent change)

(2) The trend towards increased urbanization has also helped drive the growth in the FMCG industry through

the change of form of shopping. According to a survey done by A C Nielsen in 2006, an increased number

of customers were switching to modern trade and spending more money on super markets compared to

traditional convenience stores.

Chart 6-3: Share o Trade


2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

L K R m

i l l i o n

500

1,000

1,500

2,000

2,500

3,000


2002 2003 2004 2005 2006 2007 2008 2009 2010(E)0%

2%

4%

6%

8%

10%

Modern Trade

Traditional Trade

P e r c e n t a g e

Source : A C Nielsen - Survey of Retail & Shopper Trade

2004 2005 2006

0%

20%

40%

60%

80%

100%




Moreover, recent surveys done by Unilever and other companies reveal that modern trade has grown by

about 20% - 30% over the last three years and is expected to continue the same trend. This trend is evident

through the increase in supermarkets which indicates a clear change in consumer preference.

Table 6-3 Growth in Number of Sri Lankan Super Markets/Organized Retail Channels

Supermarket 2005 2009

Cargills 94 136

Keells 21 41

Arpico 6 26

Laughs 9 10

6.2 Global Sot Drinks Industry

The soft drinks industry could be broadly categorized into two groups; namely carbonated and non-

carbonated drinks. Carbonated drinks are drinks that have added carbon dioxide like soft drinks which include

colas, sodas, and fruit avoured carbonates.

According to a recent study done by Euromonitor, the global soft drinks market was valued at USD 479 Bn in2009 and is projected to grow at a CAGR of 3.1% to reach USD 556 Bn in 2014. They have also predicted the

carbonated soft drinks market would have a value of USD 189.8 Bn by 2014 while the global non-carbonated

market to reach a value of USD 366.2 Bn depicting a clear shift in consumer tastes. Given below is a table

showing the global soft drinks market segmentation by value.

Table 6-4: Market Share of Global Carbonated Soft Drinks

Category 2004

Market Share (%)

2009

Market Share (%)

Carbonates 46.80 40.00

Bottled water 18.40 20.88

Juices 14.90 14.46

RTD tea & coee 8.50 11.98

Functional drinks 7.60 8.20

Concentrates 3.90 4.48

Total 100.00 100.00

Source: Datamonitor

Consumers are seeking increased variety in their beverages and there is a growing awareness among the

public with regards to the ingredients of the products and health and wellness issues in general. Hence, as

shown above, this interest has resulted in a decline in consumer demand for carbonated soft drinks and anincreased demand for non-carbonated drinks.

Even among the non-carbonated soft drinks, Ready To Drink (RTD) tea continues to perform well in terms of

market penetration. The table below shows the growth rates for 2009 and the expected gures for 2014.

Table 6-5: Forecast Growth Rates for Non-Carbonated Drinks

Category 2009 2014 (Forecast)

Bottled water 6.9% 3.9%

Juices 4.0% 5.2%

RTD tea & coee 9.0% 12.0% – 15.0%Source: Datamonitor




6.3 Ready to Drink Tea (RTD Tea)

Ready To Drink tea includes any type of tea that could be consumed without any further processing. RTD tea

has recently become very attractive due to the combination of many of the attributes that consumers look for

in beverages; natural healthiness, fruit avours and anti oxidants, etc. Its convenience is another predominant

factor driving its popularity. RTD tea in bottles, cans, aseptic packaging, plastic containers, or any other

packaging conguration brings the ultimate in convenience to consumers. Since ease of preparation has not

been a strong selling point for tea, marketing of tea in the U.S. and other European countries has been achallenge. However, with the introduction of RTD tea, this diculty has dissipated and thereby increasing

market share of consumption of tea.

Shown below are the global growth rates for RTD tea for the past several years.

Table 6-6: Growth Rates for RTD Tea

2004 2005 2006 2007 2008 2009

2.6% 15.4% 26.2% 15.1% 1.7% 5.0%

Source: Datamonitor

A 5% growth rate in 2009 is commendable when compared to only a 1.5% growth rate in the overall carbonatedsoft drinks industry due to the recessionary conditions in the global markets.

Moreover, the top three markets which constitute 70% of the global demand for RTD tea are China, Japan, and

the U.S. Hence, companies exporting to these countries are strategically well positioned to make use of these

growing markets.

6.4 Global Personal Care Industry

A concern for healthy skin is seen to be a global trend. With an ageing population and increased concerns of

the long-term eects of the sun, there has been much growth in skin care products. With the increase in

disposable income, consumers seek products that are healthy and benecial to them. The global growth of personal care categories was measured at 5%.

According to a study conducted by A C Nielsen, given below are some of the growing trends in the personal

care industry.

• Bath and shower gels are growing faster than standard toilet soap globally and within every region.

• Hair care and skin care regimes were seen as an important component to beauty and grooming.

• Mouthwash/oral rinses/antiseptics has seen a growth of 12%.

Personal care industry remains an attractive sector with global retail sales of USD 300 Bn realizing a growth rate of 4.5%

over the past ve years. However, with increased concerns over health risks, many companies are shifting their focus to

natural and organic products. In most of the countries the demand for organic products has been rising steadily due tothe growing consumer awareness and changing lifestyles. This has increased demand for products made from tea and

it’s by products. It is now safely presumed that tea contains benecial properties to improve the skin. As a result, a few

reputed manufacturers of beauty care products have incorporated tea extracts in their anti ageing creams, head and

body shampoos, facial masks for cleansing and tea baths for immersing. Although details of marketing and sales are not

readily available the proliferation of spas and beauty salons in addition to the up market hotels form the clientele for

these products. These also have an extension to catalog marketing and duty free sales on air lines. It can be safely

assumed that the tea extracts in the beauty care segment is a multibillion dollar industry worldwide. Further, despite

many sectors showing signs of maturation in developed markets, innovation remains high and with further economic

prosperity, this sector is expected to show more positive growth trends.




7.0 FUTURE DIRECTION AND PROSPECTS

7.1 Future Direction and Prospects

The Company’s long-term objective is to become one of the most recognized and respected tea brands in the world. In

order to achieve this, the Company plans to consolidate the brand in countries where there is already a presence whilst

endeavoring to increase the market share. In this regard an aggressive marketing campaign will be launched from the

beginning of 2011 to attract new buyers/agents particularly in countries where representation is not signicant.

It has been predicted by international nancial monitors that Russia and CIS region will be one of the key growth sectors

for tea during the next few years. “HELADIV” brand, having been established in Russia and Ukraine will expand its reach

in other CIS countries such as Kazakhstan, Belarus, Azerbaijan, Uzbekistan, Georgia etc. Russia at present consumes

approximately 240 million kg of tea per annum out of which Ceylon tea share is approximately 50-60 million kg. It is the

aim of the company to increase its market share by as much as 25% year on year in this region.

Neighbouring India is also a major tea consuming country. However, tea imports into India for consumption are

restricted with non-tari barriers favouring protectionism for agriculture. The FTA between India and Sri Lanka will be

useful for establishing a joint venture particularly for a chain of tea cafes and boutiques. The company believes that

focusing on this mass market in India will have positive results for “HELADIV” brand in the near future.

In the Western hemisphere, the American market has potential for tea variations, other than normal tea bag business.

The American market is fully saturated in mass market tea segment and does not have much room for protability unless

applied through multi origin tea blends. However, the ready-to-drink Ice Tea has the best potential, with American tea

consumption in all categories representing 80% in RTD tea. Tea variations with the inclusion of herbs and tea applications

in the life style product category similar to the Body Shop will be pursued through showcasing the Company’s products

at strategic exhibitions in the US.

It is also the vision of the Company to have oces in strategic markets. In order to fulll tea requirements from other

origins, the Company has already initiated a programme for joint ventures in India, Indonesia and Vietnam. In the next

few years these strategic partnerships will be enhanced to undertake marketing in multi origin teas. Strategy will be

focused primarily to project the goodness of tea from other origins in the specialty range such as the Darjeeling’s from

India, Keemun’s from China, Japanese Sencha etc.

With the expansion of scope in Research & Development, the Company has attracted much interest from local and

international enterprises for synergized operations. Some of the international interest revolves around the development

of pharmaceutical products based on the lab trials done by the Company’s Research & Development department. Initial

discussions with Asian Development Bank has given a clear indication to private sector funding for future development

of tea related projects which will have benets to the industry. The Government of Sri Lanka has recognized Research &

Development as an integral part in developing the national economy. It is expected that special grants or incentives for

Research & Development will be announced during the forthcoming budget.

Furthermore, with eect from November 2010 a special Development Fund for promoting and marketing of tea will be

initiated by the Sri Lanka Tea Promotion Bureau. This initiative will generate a minimum of LKR 1 billion per year over a

period of 5 years and will be managed primarily by the private sector tea exporters. As a brand developer, HVA Foods

Limited will be fully qualied to draw on this fund for any future requirement of nancial assistance in the development

of its brand name.

Within the next 5 years of operation the company hopes to be a well recognized and well established tea brand in the

world catering to beverage and non-beverage sectors harnessing the maximum potential in tea.

However, it is of importance to note that the above mentioned future plans will hold provided that tea continues to be

the most widely consumed beverage globally and Sri Lanka’s current dominant presence in the export market remains

constant or improves. The risks associated with the Company and its business activities are mentioned in Section 8.0.

However, the Company is positive in mitigating the risk factors due to the wide range of products available.




8.0 INVESTMENT CONSIDERATIONS AND ASSOCIATED RISK FACTORS

8.1 Risk Factors

Prior to investing in the Oered Shares, prospective investors should pay particular attention to the fact that

the Company and its business activities are subject to a number of r isk factors which may be within or outside

the control of the Company.

The risk factors that follow may be considered material to investors in making an informed judgment on the

Company. Since the Company’s presence is in the tea sector, the industry related risks are focused on the tea

industry. If any of the considerations and uncertainties given below develop into actual events, the Company’s

business, nancial conditions or results of operations and prospects could be adversely aected and this may

impact the market price of the Oered Shares. However, given the importance of the tea industry for the

national economy, the Company’s business is expected to be sustainable in the foreseeable future.

8.2 Industry Specic Risks

Unavourable weather conditions and wage hikes – Being a rain fed plantation crop in Sri Lanka, tea depends

greatly on weather for optimal growth. Therefore, changes in weather conditions would undoubtedly aecttea production. For example, in 2009, tea production decreased by 9.1% to 290 Mn kg compared to 2008. This

was mainly due to the dry weather conditions in all tea planting districts.

Moreover, it is assumed that the trade unions will agitate for wage increases at least every two years. The

unions represent 50% of the organized workers on estates while the wage component accounts for 60% of

the cost of production per kilo. This is considered to be the highest among all the tea producing countries. In

2009, there was a signicant hike in the wages which resulted in a further increase in cost of production.

Hence, the tea industry in Sri Lanka will always be vulnerable to wage hikes. However, the negative impact of

wage hikes could be dissipated to some level, through linking of wages to productivity. Moreover, the wage

cost is also expected to aect all other tea production countries as well.

Import taxes and non-tarif barriers – Import taxes and non-tari barriers by large tea consuming countries

could have negative impacts on the industry by hampering protability of the industry.

Threat o oreign competitors - Even though there is ample demand existing currently and further increases

expected, Sri Lankan exporters are threatened by foreign competitors. Foreign exporters have created their

own brand names by partly exploiting the incentives granted by the government in 1982. They have been

able to build their own brand names without much investment in plant and machinery on their part aided by

local exporters. These very same foreign traders have become the biggest competitors to the exporters who

have their own Sri Lankan brand names.

8.3 Company Specic Risks

Availability and price increase o raw material – The main raw material for iced tea is BM Fannings. BM

Fanning’s is a byproduct, treated as waste in the manufacturing process of converting green leaf in to made

tea. Currently the availability of BM Fannings is approximately 40 million kilos per annum. Hence the availability

of raw materials is abundant.

The entry of new players to the market may increase the demand for BM Fanning’s and thereby move the

current price up from approximately Rs. 30 per kg. However, HVA Foods Limited has taken this factor into

consideration in their marketing and pricing strategies.

Price increases of black tea and green tea which are the main raw materials for value added teas could createa dent in the company’s prot margins. Importing of orthodox teas from other origins for blending purposes

is still not fully permitted in Sri Lanka. Hence price shifts at the Colombo Tea Auction should be carefully






9.0 CORPORATE STRUCTURE

9.1 The Board o Directors

The Board of Directors guides and supervises the business and operations of HVA Foods Limited. The Board

consists of two (02) Non-Executive Independent Directors, one Non-Executive Director (01) and three (03)

Executive Directors including the Chairman. The Board has the power to appoint the Executive Directors

including the Chairman. As at the date of this Prospectus, the Board comprises of the following six (06)Directors.

Table 9-1: Details of HVA Foods Limited Board of Directors

Name Age Address Designation

Mr. A.R.H. Fernando 55 No. 220, Lake Drive,

Colombo 08

Chairman

Mr. J. Raddalgoda 39 No. 8/4, Sri Jinarathana

Mawatha, Ratmalana

Executive Director

Mr. H.J. Fernando 27 No. 220, Lake Drive,Colombo 08 Executive Director

Mrs. V.S. Amunugama Fernando 41 No. 220, Lake Drive,

Colombo 08

Non-Executive Director

Mr. N.C. Vitarana 79 No. 14, Alwis Terrace,

Colombo 03

Non-Executive

(Independent) Director

Mr. J.H.P. Ratnayeke 61 995/7, Park Lane, Rajagiriya Non-Executive

(Independent) Director

9.2 The Board o Directors o HVA Lanka Exports (Private) Limited The Board of Directors of the holding company of HVA Foods Limited is as follows:

Table 9-2: Details of HVA Lanka Exports (Private) Limited Board of Directors

Name Age Address Designation

Mr. A.R.H. Fernando 55 No. 220, Lake Drive,

Colombo 08

Director

Mrs. V.S. Amunugama Fernando 41 No. 220, Lake Drive,

Colombo 08

Director




9.3 Proles o the Board o Directors

Mr. A.R.H. Fernando – Chairman

The CEO is also in the capacity of an Executive Director. Mr. Fernando has over 35 years of experience in the

tea industry and has been successful in developing, promoting and marketing the traditional beverage of tea

in many innovative variants over the last several years. Prior to nding his own Company, he began his career

as a trainee Tea Taster at Carson, Cumberbatch & Co., Ltd. He was promoted to a Tea Executive in 1979. He joined Brooke Bond Ceylon Limited as a tea buyer where he was promoted to Tea Manager in 1985. In 1982

he spent one year with Brooke Bond Commodities Ltd. United Kingdom learning international tea blending

and trading. He served on the Colombo Tea Traders Association as a member and also as a Director on the Sri

Lanka Tea Board. He functioned as the President of the National Chamber of Exporters in 2008 and 2009. He

is currently the Vice Chairman of the Tea Exporters Association of Sri Lanka.

Mr. J. Raddalgoda - Executive Director

Mr. Raddalgoda accounts for nearly eight years of experience in the plantation management in the private

sector and nal four years of same holding managerial level posts. His knowledge on the plantation sector

includes of tea, rubber, coconut and cardamom. He has been with the Company since February 1998 andhandled tasks under managerial positions in the areas of, Production and Commercial operations, Human

Resource and Administration. Before joining the Company Mr. Raddalgoda has served as a Plantation Executive

at Kelani Valley Plantations Limited.

Mr. H.J. Fernando – Executive Director

Mr. Fernando has over 10 years of experience in the tea industry. He joined HVA Lanka Exports (Private)

Limited as a Management Trainee and currently acts as the Director Operations being responsible for

manufacturing and procurement and is also involved in international brand marketing of the Company.

Mrs. V.S. Amunugama Fernando – Non-Executive Director Mrs. Fernando is a graduate of the Faculty of Law, University of Colombo and an Attorney-at-Law by profession.

She counts for over 17 years of experience in the eld of advertising and is the founder and joint Managing

Director of TRIAD Advertising (Pvt.) Ltd.

Mr. N.C. Vitarana – Non- Executive (Independent) Director

Mr. Vitarana is a graduate of the University of Ceylon and a Chartered Accountant. He brings with him a wealth

of knowledge and experience acquired over a career spanning over 57 years in areas such as taxation, auditing,

banking and nancial services, mergers and acquisitions and corporate restructuring both in Sri Lanka and

abroad. Mr. Vitarana is a qualied Chartered Accountant has also served as a director of John Keels Holdings

PLC.

Mr. J.H.P. Ratnayeke – Non-Executive (Independent) Director

Mr. Ratnayeke is a leading commercial lawyer and the senior partner and founder of Paul Ratnayeke Associates.

He graduated with honors from the University of Ceylon (Colombo) and has been awarded a LLM Degree by

the University of London. He is an Attorney-at-Law of the supreme court of Sri Lanka and a Solicitor of the

Supreme Court of England & Wales.




9.4 Directors’ Interest in Shares

9.4.1 Directors’ Direct and Indirect Shareholdings in the Company

The Directors’ direct shareholdings in the Company as at 03rd January 2011 are tabulated below.

Table 9-3: Directors’ Shareholdings in HVA Foods Limited as at 30th September 2010

Name o Director Number o Shares Held

Mr. A.R.H. Fernando 62

9.4.2 Sale or Purchase of Shares by directors

There were no sales, transfers or purchases of shares made by the Directors during the two year period

immediately preceding the date of this Prospectus.

9.4.3 Directors’ Emoluments

Emoluments paid in the form of salaries or bonuses to the Directors during FY 2009/10 amounted to LKR

7,306,800. The Directors are expected to be remunerated in the form of salaries, bonuses during FY 2010/11to an approximate extent of LKR 12 Million.

9.4.4 Other Directorships Held by the Board

Table 9-4: Other Directorships

Name o Director Other Directorships Held

Mr. A.R.H. Fernando HVA Lanka Exports (Private) Limited


HVA Farms (Private) Limited

HVA Beverages (Private) LimitedHVA Fineteas (Private) Limited

Lake Drive Holdings (Private) Limited

Mr. J. Raddalgoda HVA Farms (Private) Limited

HVA Beverages (Private) Limited

Mr. H.J. Fernando Lake Drive Holdings (Private) Limited

Mrs. V.S. Amunugama Fernando HVA Lanka Exports (Private) Limited


HVA Farms (Private) Limited

HVA Beverages (Private) Limited

HVA Fineteas (Private) Limited

Lake Drive Holdings (Private) Limited

TRIAD Advertising (Private) Limited

Powerhouse Limited

Sarva Integrated (Private) Limited

Imageline (Private) Limited

Asia Commerce (Private) Limited

Printage (Private) Limited

Thirty Five KM (Private) Limited





Emagewise (Private) Limited

Traidhot.com (Private) Limited

Traid Mantram (Private) Limited

Spaacs (Private) Limited

Adpack Productions (Private) LimitedHardtalk (Private) Limited

Hammer BTL (Private) Limited

Hotel Reef Comber PLC

Mr. N.C. Vitarana None

Mr. J.H.P. Ratnayeke Chairman – Arpico Furniture Limited

Asia Fort Sri Lanka Direct Investment Fund Limited

Asia Growth Fund (Private) Limited

Asia Securities (Private) LimitedAsian Alliance Insurance PLC

Kalyani Mahal (Private) Limited

P.R. Intellectual Property Services (Private) Limited

P.R. Secretarial Services (Private) Limited

Nature Holdings Limited

Deputy Chairman – Asia Capital PLC

Kegalle Plantations Limited

Maskeliya Plantations Limited

RPC Construction (Private) LimitedRPC Management Services (Private) Limited

Raajje Foundation

Director – AEN Palm Oil Processing (Private) Limited

Arp-Eco (Private) Limited

Arpico Exotica Asian (Private) Limited

Arpico Flexifoam (Private) Limited

Arpico Homes Limited

Arpico Interiors (Private) Limited

Arpico Plastics Limited

Arpidag International (Private) Limited

Arpimalls Development Co. (Private) Limited

Arpitec (Private) Limited

Capital Reach Holding Limited

Exotic Horticulture (Private) Limited

Hamefa Kegalle (Private) Limited

Maskeliya Tea Gardens Ceylon Limited

MPL Dendro Thermal Power (Private) Limited

Namunukula Plantations Limited

Nuwara Eliya Hotels Limited

Plastishells Limited





Richard Peiris & Company Limited

Richard Peiris Distributors Limited

Richard Peiris Group Services (Private) Limited

Richard Peiris Natural Foams Limited

Richard Peiris Plantations (Private) LimitedRichard Peiris Rubber Compounds Limited

Richard Peiris Rubber Products Limited

Richard Peiris Tyre Co., Limited

RPC Airlines (Private) Limited

RPC Global Travels (Private) Limited

RPC Logistics (Private) Limited

PC Plantation Management Services (Private) Limited

Sierra Cables PLC

Sierra Construction (Private) LimitedWeligama Bay Properties (Private) Limited

Arpitalian Compact Soles (Private) Limited

RPC Polymers (Private) Limited

RPC Southern Industrial Park (Private) Limited

Alternate Director – Allied Export and Import Agencies (Private) Limited

Colombo Agencies Limited

Jims Farm (Private) Limited

9.4.5 Directors’ Interest in Assets

The Directors hold no interest in assets acquired, disposed or leased by the Company during the two years

preceding the Oering other than the acquisition of HVA Holdings (Private) Limited. Furthermore, it is not

proposed that the Directors will hold any interest in assets to be acquired, disposed or leased by the Company

in the two years subsequent to the Oering.

9.4.6 Directors’ Interest in any Material Contracts

The Directors hold no interest in contracts with the Company.

9.4.7 Statement – Board of DirectorsNo Director or a person nominated to become a Director of the Company is or was involved in any of the

following events:-

• A petition under any bankruptcy laws led against such person or any partnership in which he was a

partner or any corporation of which he was an executive ocer;

• Convicted for fraud, misappropriation or breach of trust or any other similar oence which the CSE

considers a disqualication.

9.5 Corporate Governance Practices

The Directors place a high degree of importance on sound corporate governance practices and are committed

to the highest standards of corporate governance within the organization.




The Company understands, supports and has applied the core concepts that underlie enterprise governance

and ensures that its standards remain in compliance with the regulatory requirement of the CSE Listing Rules.

In line with this, the Company has appointed two Independent Directors to the Board of HVA Foods Limited

facilitating independent judgment in Board discussions and decisions. The Board also consists of two Non-

Executive Independent Directors, one Non-Executive Director and three Executive Directors including the

Chairman.

In line with this, Directors and functions of the above committees are detailed below.

9.6 Remuneration Committee

The Remuneration Committee consists of two Non-Executive Independent Directors. They are namely Mr.

N.C. Vitarana and Mr. J.H.P. Ratnayeke. The committee is responsible for making recommendations to the

Board on;

• Remuneration framework and levels of the Senior Management

• Senior Management performance and equity based remuneration plans including performance

incentives and hurdles• Remuneration of Executive Directors

Aggregate remuneration paid to Executive and Non-Executive Directors during last year and amount expected

to be paid in the current year is given under Section 9.4.3 of this Prospectus.

9.7 Audit Committee

The Audit Committee consists of two Non-Executive Independent Directors. They are namely

Mr. N.C. Vitarana and Mr. J.H.P. Ratnayeke. The Committee is responsible for the following;

• Evaluating and monitoring the Company’s control environment and risk management function

• Overseeing and reviewing the quality, cost and scope of internal and external audits• Reviewing the reports presented to the Committee by both auditors and management

• Recommending to the Board the appointment of internal and external auditors

• Reviewing the Company’s management and statutory reporting

• Reviewing and approving of nance and accounting policies and the ongoing monitoring of their

implementation and eectiveness

• Ongoing nancial monitoring of the Company’s various disclosure obligations

• The review and pre-approval of any non audit services provided by the internal or external auditors to

ensure their independence is maintained at all times

9.8 Senior Management

Table 9-5: Senior Management of HVA Foods Limited

Name Designation

Mr. A.R.H. Fernando Chairman

Mr. H.J. Fernando Executive Director

Mr. V.I. Gunaratne Manager – Marketing

Mr. S.D. Hewathudella Manager – Finance

Mr. J. Raddalgoda Executive Director

Mr. J. Kannangara Manager – Quality Assurance and Research & DevelopmentMr. F.V.L. Samarasinghe Specialist Process – Manufacturing & Industrial Engineering




Mr. A.R.H. Fernando – Chairman

Refer prole in Section 9.3

Mr. H.J. Fernando – Executive Director


Mr. J. Raddalgoda – Executive Director


Mr. V.I. Gunaratne – Manager, Marketing

Mr. Gunaratne began his career as a Marketing Executive at John Keels Group in 1997 & spent 05 years serving

the group in subsidiaries in Tea, Leisure & Transport sectors. Subsequently he joined Navigation Maritime Ltd,

agents for Hanjin Shipping where he gathered substantial knowledge on ocean freight & its overall operation

during the period of 2001 – 2003. Mr. Gunarathne joined HVA Group in 2003 as an Assistant Manager Tea &

progressed in his career managing the prestigious Eastern Market where he excelled with remarkable

performance. At preset he holds the portfolio of the Marketing Manager of the Group.

Mr. S.D. Hewathudella – Manager, Finance

Mr. Hewathudella started his career as a clerk and reached senior management level within a remarkable time

frame. He has gained experience in various industries including the hotel sector, hyper & super markets

industry (local & overseas) and tea industry. He counts over 25 years of experience in the Finance Management

& Accountancy eld. For the last 17 years Mr. Hewathudella has been holding senior Managerial positions in

several reputed organizations.

Mr. Kannangara – Manager, Quality Assurance and Research & Development

Mr. Kannagara holds more than 14 years of experience in Quality Assurance Systems & Research & Developmentof the FMCG industry. He holds a BSc. Degree in Natural Science and is currently reading for his MBA at the

University of Kelaniya.

Mr. F.V.L. Samarasinghe – Specialist Process, Manufacturing & Industrial Engineering

Mr. Samarasinghe started his career as a Factory Manager at Unilever, Sri Lanka and at Instant Tea Plant,

Agarapathana. He counts for more than 30 years of experience in manufacturing, engineering and industrial

engineering. He is also a DNV accredited auditor in HAZARD and Operatability, Health & Safety in industrial

processes. Additionally he is a JIPM accredited trainer & auditor in TPM & 5s. He holds an Msc (Eng), B Tech

(Eng) Hons., Post Graduate Diploma in Industrial Engineering.

9.8.1 Senior Managements’ Emoluments

Emoluments paid to the Chairman and the Senior Management in the form of salaries and bonuses during FY

2009/10 amounted to LKR 10,646,424. The Senior Management is expected to be remunerated in the form of

salaries and bonuses during the FY 2010/11 to an approximate extent of LKR 10 Million.

9.9 Statement – Chairman

Chairman of the Company has not been involved in any of the following:

• A petition under any bankruptcy laws led against such person or any partnership in which he was a

partner or any corporation of which he was an executive ocer;• Convicted for fraud, misappropriation or breach of trust or any other similar oence which the CSE

considers a disqualication.




9.10 Details o the Management Agreements

There are no management agreements presently in force or currently being considered by HVA Foods Limited.

9.11 Human Resources

The number of employees of the Company as at 02nd December 2010 was 86, as detailed below.

Table 9-6: Human Resources

CATEGORY NUMBER OF STAFF

Directors, Executives Directors & Executives 25

Clerical, Supervisory, and Minor Staf Clerical 17

Supervisory 11

Manual Grades 33

Total 86

As at 30th September 2010, there were no Trade Unions, Collective Agreements or actions pending against

the Company in the Labour Tribunals.

9.12 Inormation Technology

HVA takes every eort to ensure that its information technology systems are current and up to date in line with

the Company goals and strategies. The Company’s e-mail servers are based in the US and have 99.9%

guaranteed uptime. The Company apart from its servers in Kandana, has an osite backup storage which

demonstrates management’s commitment towards disaster recovery.




10.0 CAPITAL STRUCTURE

As at the date of this Prospectus, the Stated Capital of the Company is Sri Lankan Rupees Fifteen Million and

Twenty (LKR 15,000,020) divided into Forty Six Million Five Hundred Thousand and Sixty Two (46,500,062) fully

paid Ordinary shares.

10.1 An Overview o the Capital Structure The detailed breakdown of the Stated Capital of HVA Foods Limited is given below.

Table 10-1 : Stated Capital of HVA Foods Limited

2010 2009 2008

Stated Capital (LKR) 15,000,020 15,000,020 15,000,020

Number o Ordinary Shares in Issue 46,500,062* 1,500,002 1,500,002

* The Company sub-divided each Ordinary Share into thirty one (31) Ordinary shares on 29th September 2010

• The Company has not issued any new Ordinary Shares during the preceding three nancial years.

• The Company has no other classes of shares other than the above mentioned Ordinary Shares.

• There are no restrictions on the purchase of shares by non-residents in the Company.

10.2 Free Transerability o Shares

Upon the Ordinary Shares of the Company being listed on the CSE, such shares shall be freely transferable and

the registration of the transfer of such listed shares shall not be subject to any restriction, save and except to

the extent required for compliance with statutory requirements.

10.3 Other Securities

The Company has not issued any convertible debt securities or any other class of shares other than the sharesstated above. Further there are no securities of the same or other class subscribed or sold privately in

conjunction with this Oering.

10.4 Takeover Ofers

There have been no takeover oers by third parties in respect of the Company’s shares during the past two

years and no takeover oers have been made by the Company in respect of shares of third parties.

10.5 Share Re-Purchases or Redemptions

The Company has not engaged in any share re-purchase, redemption or stated capital reduction exercises in

the two years preceding the date of this Prospectus.

10.6 Ten Largest Shareholders as at 03rd January 2011

Table 10-2: Ten Largest Shareholders – Pre IPO after the Split

Name No. o Ordinary Shares Total % 2008

HVA Lanka Exports (Pvt.) Limited 46,500,000 46,500,000 99.9999 15,000,020

Mr. A.R.H. Fernando 62 62 0.0001

Total 46,500,062 46,500,062 100.00 1,500,002




10.7 Major Shareholders o HVA Lanka Exports (Private) Limited rom 1990 to date

Table 10-3: Major Shareholders of HVA Lanka Exports (Private) Limited

Name No. o Shares

Mountain Hawk (Private) Limited 149,998 Transferred

HVA Holdings B.V. 99,900 Transferred

Mr. A.R.H. Fernando 7,602,029

Mahamadaachchi Lushantha De Silva 49,988 Transferred

Merchant Bank of Sri Lanka 166,667 Transferred

Paxion Investment Company Ltd. 83,333 Transferred

HVA Holdings (Private) Limited 366,572 Transferred

Dohothodona Jayantha Gunawardena 330,011 Transferred

Mrs. V.S. Amunugama Fernando 01

Vallible Holdings (Pvt.) Ltd. 775,407 Transferred

Arrow International (Pvt.) Ltd. 3,801,015 Transferred

10.8 Post IPO Shareholding Structure

Table 10-4: Post IPO Shareholding Structure

Name No. o Ordinary Shares Total %

HVA Lanka Exports (Pvt.) Limited 46,500,000 46,500,000 69.9999

A.R.H. Fernando 62 62 0.0001

Public 19,928,598 19,928,598 30.00

Total 66,428,660 66,428,660 100.00




10.9 Ratios

Year Ended 31st March Six Months Ended 30th

September

Ratio Analysis 2009 2010 2009 2010

Protability

Revenue Growth 4% 21% (2%) 13%COS/Revenue 79% 81% 84% 83%

GP margin 21% 19% 16% 17%

Administration exp. growth rate (52%) 8% 9% 36%

Operating prot Margin 19% 18% 12% 11%

Net prot Margin 4% 11% 7% 10%

ROA 4% 13% 3% 6%

ROE 4079% 145.69% 101% 36%

Liquidity

Current Ratio 1.03 1.04 1.00 0.95

Quick Asset ratio 0.76 0.88 0.85 0.82

Investor ratios

EPS * 0.32 1.17 0.36 0.62

NAV per share 0.17 1.44 0.52 2.77

Gearing

LT debt/ Equity 3387% 425% 1151% 217%

Interest Coverage 1.31 2.86 2.08 3.02

Total liability/equity 41.84 6.08 14.92 3.62

* Restated to reect the new number of shares post-split






Table 11-4: HVA Foods Limited – Summarized Interim Balance Sheet

As at March 31 Sept. 30, 2010

(gures in rupees)

Sept. 30, 2009

(gures in rupees)

Total Non Current Assets 290,756,832 153,591,941

Total Current Assets 313,994,275 233,847,081

TOTAL ASSETS 604,751,107 387,439,022

Total Capital & Reserves 126,978,742 24,339,790

Total Non Current Liabilities 146,970,330 129,722,324

Total Current Liabilities 330,802,035 233,376,908

TOTAL EQUITY & LIABILITIES 604,751,107 387,439,022

11.2 Perormance o Operations or the Five Years Ended 31st March 2010

REVENUE

The movement in revenue of HVA Foods Limited during the last ve nancial years is depicted below.

Chart 11-1: Revenue Movement

As shown above, the Company has recorded a CAGR of 10% over the last ve years. It is of importance to note

that even in 2009, when the overall tea industry was aected, the Company has been able to maintain a

positive growth trend. The increase in revenue is mainly due to the encouraging escalation in prices over the

past several years. For example, export prices of HVA Foods Limited has recorded a CAGR of 9% from 2007-

2009. Despite being a predominantly export oriented company and been faced with unexpected natural and

nancial conditions of overseas countries, the Company has achieved commendable results in terms of turnover numbers.

Gross and Operating Prot

The following gures illustrate the gross and operating prots of HVA Foods Limited along with the gross and

operating prot margins.

2006 2007 2008 2009 2010

L K R ‘ 0 0 0

-

100,000

200,000

300,000

400,000

500,000




Chart 11-2: Gross Prot Movement

Chart 11-3: Operating Prot Movement

Even though the Company’s gross prot and operating prot have increased in terms of absolute values, the

margins have decreased due to the slight increase in cost of sales to revenue. The gross margins are

comparatively lower when compared to some of its competitors who have achieved about 40% gross marginsover the past three years. However, the operating prot margins are closely in line with the industry norms of

approximately 13% in recent years compared to a 16% industry margin.

Net Prot

The movement in net prot of HVA Foods Limited during the last ve nancial years is depicted below.

Chart 11-4: Net Prot Movement

The net prot of the Company has been severely aected due to the high nancing costs. As mentioned

above, the Company has continuously been able to maintain healthy operating prots which indicate healthyand stable operations. Moreover, the building of the brand “HELADIV” required substantial amounts of capital

in terms of Research & Development, brand registration and surveillance, advertising, etc. that were met by

Gross Prot

Gross Prot Margin

2006 2007 2008 2009 2010-

20,000

40,000

60,000

80,000

100,000

0%

5%

10%

15%

20%

25%

Operating Prot

Operating Prot Margin

2006 2007 2008 2009 20100

20,000

40,000

60,000

80,000

100,000

0%

5%

10%

15%

20%

Net Prot

Net Prot Margin

2006 2007 2008 2009 2010

L K R

m i l l i o n

(40,000)

(20,000)

0

20,000

40,000

60,000

80,000

(10%)

(5%)

0%

5%

10%

15%

20%




commercial borrowings which increased nance costs considerably. However, in 2010 there has been a

decrease of 49% of nance costs which helped boost the Company’s net prot considerably. Hence, it is

expected that post IPO, with the retirement of a substantial amount of debt, the Company will be able to

perform at much better margins. Moreover, the turnaround in the bottom line of the Company seen starting

from FYE 2009, has a direct correlation to the marketing expenses borne in the earlier years to portray “HELADIV”

as a world renowned brand. This further claries the importance of the assignment of the brand name via the

vesting of HVA Holdings (Private) Limited to HVA Foods Limited.

Recent Performance of HVA Foods Limited

The performance of the Company from April - July compared to the same period in the previous year is

depicted below. As seen below, the Company has performed substantially better during this year compared

to the same period last year. The dip in revenue and prot in July is due to the decrease in sales to the CIS

region during the hot summer season.

Chart 11-5: Monthly Revenue

Chart 11-6: Prot Beore Taxation

L K R

2009

2010

April May June July Aug. Sep.40,000,000

50,000,000

60,000,000

L K R

2009

2010

April May June July Aug. Sep.0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000




12.0 STATUTORY AND OTHER GENERAL INFORMATION

12.1 Hosting o Prospectus, Application Form and the Articles o Association on the Web

This Prospectus, Application Form and the Articles of Association of the Company will be available on the

website of the CSE (www.cse.lk) and on the Company website (www.heladiv.com), from the date of opening

of the Issue, until the subscription list closes or up to fourteen (14) Market Days, whichever is earlier.

12.2 Inspection o Documents

The Articles of Association, the Auditor’s Report, Audited Financial Statements for the ve nancial years

immediately preceding the date of this prospectus (i.e. FY 2005/06 to FY 2009/10, both periods inclusive),

Audited Interim Financial Statements for the period ended up to 30th September 2010 and all other documents

to which references are made in this Prospectus could be inspected by the public during normal working

hours at the Registered Oce of the Company from the date hereof until the subscription list closes or up to

fourteen (14) Market Days, whichever is earlier.

12.3 Brokerage

Brokerage at the rate of zero decimal ve per centum (0.5%) of the Share Oer Price will be paid in respect of

the number of shares allotted/allocated on Applications bearing the seal of any bank operating in Sri Lanka or

a member/trading member of the CSE.

12.4 Underwriting

The Oer is not underwritten and is not conditional upon any minimum subscription being met.




13.0 TAXATION

The following information is an overview of selected taxation and other regulations that may be relevant to

the Company and potential investors with regard to share transactions in the Democratic Socialist Republic of

Sri Lanka. The discussion does not claim to be a comprehensive explanation of regulations and considerations

that pertain to the purchase, ownership and disposition of the Oered Shares. The explanations are based on

provisions eective in Sri Lanka at the time of printing of this Prospectus. Investors are advised to consult theirown advisors prior to engaging in transactions related to the Oering.

13.1 Corporate Taxation

As per the agreement signed with the Board of Investment of Sri Lanka (BOI), HVA Foods Limited would be

entitled for the following benets.

• The Company enjoys a concessionary tax rate of 15% for 20 years from 1997. However, according to the

2011 budget proposal, export prots which consist of more than 65% domestic value addition sold with a

Sri Lanka brand name registered in Sri Lanka will be reduced to 10%.

According to the Inland Revenue Act, the tax rates given below apply for a company incorporated prior to 01st

April 2002 with a minimum investment of LKR 50 million or incorporated after 01st April 2002 with a minimuminvestment of LKR 10 million.

• Export of tea packets or packages containing less than one kilo of tea is exempt from income tax from April

01, 2009 till 31st March 2011 in terms of Section 17 of the Inland Revenue Act.

• Export of tea bags containing made tea not exceeding four grams is also exempt from income tax under

Section 16 of the Inland Revenue Act.

13.2 Withholding Tax (WHT) or Dividends

In general, dividends distributed by resident companies out of taxable income to resident or non-resident

shareholders are subject to WHT at the rate of 10% under Section 153 of the Inland Revenue Act No. 10 of

2006. The Company is required to deduct dividend tax at source and remit the same to the Department of

Inland Revenue.

Other than the WHT referred to above, dividends paid on shares to shareholders of the Company will not be

subject to any other Sri Lankan tax. Dividend income received by a company resident in Sri Lanka from

another company resident in Sri Lanka does not form part of statutory income and is therefore not taxable in

the hands of the recipient company.

13.3 Economic Service Charge (ESC)

The Company can claim ESC against income tax liability. Unclaimed ESC can be carried forward only for ve

(05) years.

The Company is liable to pay ESC at the rate of 0.25% on its turnover, under the Schedule to the Economic

Service Charge Act No. 13 of 2006, as amended.

13.4 Taxation o Share Transactions

A transaction tax at the rate of 0.2% on the sales and purchase of all share transactions is being charged from

both the buyer and the seller since January 1, 2005. This tax is part of the transaction cost charged when

trading shares on the CSE.

13.5 Stamp Duty The Company is liable to pay stamp duty at the rate of 0.5% for the Oering and on any new shares that may

be issued in the future in line with current stamp duty regulations.




14.0 STATUTORY DECLARATIONS

Statutory Declaration by the Directors

03rd January 2011

We, the undersigned being the Directors of HVA Foods Limited hereby declare and conrm that we have read the

provisions of the Companies Act No.7 of 2007 relating to the issue of the Prospectus and that those provisions have

been complied with.

This Prospectus has been seen and approved by us and we collectively and individually accept full responsibility for

the accuracy of the information given and conrm that the provisions of the CSE Listing Rules of the Colombo Stock

Exchange and the Companies Act. No. 7 of 2007 and any amendments to it from time to time have been complied

with and after making all reasonable enquiries and to the best of our knowledge and belief, there are no other facts

the omission of which would make any statement herein misleading or inaccurate. Where representations regarding

the future performance of the Company have been given in the Prospectus, such representations have been made

after due and careful enquiry of the information available to the Company and making assumptions that are

considered to be reasonable at the present point in time and according to our best judgement.

Name Designation Signature

Mr. A.R.H. Fernando Chairman Sgd.

Mr. H.J. Fernando Executive Director Sgd.

Mr. J. Raddalgoda Executive Director Sgd.

Mrs. V.S. Amunugama Fernando Non-Executive Director Sgd.

Mr. N.C. Vitarana Non-Executive (Independent) Director Sgd.

Mr. J.H.P. Ratnayeke Non-Executive (Independent) Director Sgd.

Statutory Declaration by the Managers to the Issue

03rd January 2011

We, Acuity Partners (Private) Limited, of 53, Dharmapala Mawatha, Colombo 3 being the Managers to this

Public Share Issue of HVA Foods Limited hereby declare that to the best of our knowledge and belief the

Prospectus constitutes full and true disclosure of all material facts about the Issue and HVA Foods Limited

whose Ordinary Voting Shares are being issued.

Sgd. Sgd.

Director Director




Statutory Declaration by the Company

03rd January 2011

An application has been made to the Colombo Stock Exchange for permission to deal in and for a listing for

all of the Ordinary Voting Shares issued by the Company and those Ordinary Voting Shares which are the

subject of this issue. Such permission will be granted when the ordinary shares are listed on the Colombo

Stock Exchange. The Colombo Stock Exchange assumes no responsibility for the correctness of any of the

statements made or opinions expressed or reports included in this Prospectus. Listing on the Colombo Stock

Exchange is not to be taken as an indication of the merits of the Company or of the securities issued.

Sgd. Sgd.

Director Director




ACCOUNTANT’S REPORT

AND

FIVE YEAR SUMMARY






2.2 Audited Financial Statements or the year ended 31st March 2010 The Balance Sheet as at 31st March 2010 and related Statement of Income, for the year then ended are set out on pages 85 to 106

of the Prospectus. We have audited these nancial statements and our report dated 30th September 2010 is attached to the

Financial Statements.

2.3 Interim review o the Financial Statements or the six months ended 30th September 2010 The consolidated balance sheet as at 30th September 2010 and related statement of Income for the nancial period then ended

are set out on pages 108 to 127 of the prospectus. We have done a review according to the Sri Lanka Standard on ReviewEngagements-2400 on these nancial statements and our report dated 19th November, 2010 is attached to the Prospectus.

Following are the major events that took place during the period of 01th April 2010 to 30th September 2010.

- The company acquired HVA Holding (Pvt) Ltd on 29th September 2010 for a consideration of Rs.45Mn. The consideration was

accounted as payable to HVA Lake Drive (Pvt) Ltd since it was the parent company of HVA Holding (Pvt) Ltd. As set out in the

objectives of the prospectus, consideration will be settled by using the proceeds received from the initial public oering.

- The group has recognized the brand “HELADIV” as an intangible asset in the interim nancial statements as derived from the

business combination. Refer note 12 to the interim review nancial statements for the details of the brand.

- The company has sub divided an ordinary share into 31 ordinary shares, thereby increasing the number of the ordinary shares

to 46,500,062 shares. The special resolution was passed on 29th September 2010.- The company acquired a land for Rs. 6,000,000 from Lake Drive Holding (Pvt) Limited, a related company. Details are disclosed

in Note 10.5 of the Interim Financial Statements.

2.4 Audit ReportsWe have audited the nancial statements of the Company for the periods ended 31st March 2006 to 31st March 2010. Qualied

opinions have been issued for the nancial years 2005/06 and 2006/07 and reports with emphasis of matter have been issued for

the nancial years 2007/08 and 2008/09 as described below. An unqualied audit opinion has been issued for the nancial year

ended 31st March 2010.

Year Qualications made in the Audit Report

2005/06 Qualications reported were;

a) The corresponding gures for the year ended 31st March 2005 were subject to a disclaimer of opinion dueto a limitation of scope in obtaining sucient appropriate audit evidence for the audit.

b) The Company has accumulated losses amounting to Rs.96,445,654/- and its current liabilities exceeded

current assets by Rs.57,678,237/- and total liabilities exceeded total assets by Rs.75,223,184/- as at 31st March

2006. However, as disclosed in the nancial statements the holding company has planned to infuse Rs.80m

equity.

2006/07 Qualication reported was;

The Company has accumulated losses amounting to Rs.101,719,137/- and its current liabilities exceeded current

assets by Rs.36,149,426/- and has a negative cash ow of Rs.52,398,245/- during the year. Further there is a

receivable of Rs.62,539,888/- from holding company which has a negative Balance Sheet. These factors raise

substantial doubt that the company will be able to continue as a going concern. However, capital infusion for

operations of the Holding Company after the year end may enable the company to overcome short term cash

ow requirements

Year Emphasis o Matter highlighted in the Audit Report

2007/08 The Company incurred a loss of Rs.16,463,446 during the year ended March 31st 2008 and, as of that date, the

accumulated losses were Rs.118,182,584/- current liabilities exceeded current assets by Rs.112,381,486 /-and

total liabilities exceeded total assets by Rs.7,045,710/-. These factors raise substantial doubt that the company will

be able to continue as a going concern.

2008/09 The accumulated losses of the Company were Rs.103,364,619/- and the current liabilities exceeded current

assets by Rs.14,041,481/-. These factors raise substantial doubt that the company will be able to continue as a

going concern.




HVA Holding (Pvt) Ltd was audited by another auditor who has expressed a qualied opinion due to the substantial doubt in the

company’s ability to continue as a going concern. Further, the audit report did not comply with the requirements of SLAuS 700: The

Auditor’s Report on Financial Statements.

2.5 Accounting Policies The Financial Statements of the Company for the periods ended 31st March 2006 to 31st March 2010 comply with Sri Lanka

Accounting Standards.

The accounting policies of the Company are stated in detail in the audited nancial statements of HVA Foods (Pvt) Limited for the

year ended 31st March 2010.Changes in the accounting policies of the Company since 31st March 2006 to 31st March 2010 are

given below.

Year Changes in Accounting Polices

2005/06 There were no material changes.

2006/07 Except for the following there were no material accounting policy changes to the nancial statements.

• The Company has adopted the following revised Sri Lanka Accounting Standards during the year.

a) SLAS – 03 (revised) Presentation of Financial Statements

b) SLAS – 12 (revised) Events after the Balance Sheet Date

c) SLAS – 14 (revised) Income Tax

d) SLAS – 18 (revised) Property, Plant & Equipments

e) SLAS – 19 (revised) Leases

f ) SLAS – 21 (revised) The Eect of Changes in Foreign Exchange Rates

g) SLAS – 30 (revised) Related Party Disclosures

• The cost of the inventories based on weighted average cost principle instead of FIFO principle, used in year 2005/06.


2008/09 Except for the following there were no material accounting policy changes to the nancial statements.

• The Company has made changes to be in compliance with Sri Lanka Accounting Standard No.16 – Employee

Benets (Revised 2006). As a result, the gratuity liability was valued using the Gratuity Formula method.


2.6 Dividends The Company has not declared dividends for the periods ended 31st March 2006 to 31st March 2010.

2.7 Events ater the Balance Sheet Date There were no signicant events that occurred after the last Balance Sheet date of 31/03/2010 except for the IPO of the shares and

a share split approved by the Board of Directors on 29th September 2010.

Yours faithfully,

Chartered Accountants

Colombo

SR/CP




HVA Foods (Pvt) Ltd

Five Years Summary - Income Statement

2009/10 2008/09 2007/08 2006/07 2005/06

Rs. Rs. Rs. Rs. Rs.

Revenue 488,206,319 402,379,235 386,865,694 253,852,267 299,121,853Gross Prot 93,483,325 84,892,616 54,593,941 51,662,730 44,957,269

Net Prot before nance cost 78,274,664 70,493,436 14,828,634 17,963,603 9,557,904

Prot/(loss) before tax 55,588,197 18,036,363 (16,458,410) (5,262,858) 11,318,983

Taxation (1,313,429) (3,218,398) (5,036) (10,623) (1,359,589)

Prots attributable to Shareholders 54,274,768 14,817,965 (16,463,446) (5,273,481) 9,959,394

HVA Foods (Pvt) Ltd

Five Years Summary - Balance Sheet

2009/10 2008/09 2007/08 2006/07 2005/06

Rs. Rs. Rs. Rs. Rs.

Non-current assets 236,285,570 158,110,838 160,852,603 161,438,801 64,868,023

Current assets 281,371,485 174,815,198 177,445,251 230,920,219 113,974,378

Total Assets 517,657,055 332,926,036 338,297,854 392,359,020 178,842,401

Capital & reserve

Stated Capital 15,000,020 15,000,020 15,000,020 15,000,020 15,000,020

Revaluation Reserve 134,000,948 96,136,854 96,136,854 96,136,854 6,212,450

Retained Earnings/(losses) (49,089,851) (103,364,619) (118,182,584) (101,719,137) (96,445,654)

99,911,117 7,772,255 (7,045,710) 9,417,737 (75,233,184)

Non-current liabilities 145,945,728 136,297,102 55,516,826 115,871,638 82,422,970

Current liabilities 271,800,210 188,856,679 289,826,738 267,069,645 171,652,615

Total Equity & Liabilities 517,657,055 332,926,036 338,297,854 392,359,020 178,842,401




HVA Foods (Pvt) Ltd

Five Year Summary - Cash Flow Statement

2009/10 2008/09 2007/08 2006/07 2005/06

Rs. Rs. Rs. Rs. Rs.

Prot before taxation 55,588,197 18,036,363 (16,458,410) (5,262,858) 11,318,983Operating prot before

working capital changes 95,888,094 54,147,710 23,488,867 22,072,783 22,688,217

Net cash from/ (used in)

operating activities (8,123,833) 11,472,892 78,065,640 (187,679,128) 7,604,765

Net cash used in

investing activities (51,451,541) (7,510,380) (8,248,593) (11,940,528) (7,958,710)

Net cash ows from

nancing activities 49,927,284 44,605,559 33,453,217 148,093,448 (243,214)

Net change in cash and

cash equivalents (9,648,090) 48,568,071 36,363,830 (51,526,208) (597,159)

Cash and cash equivalents

at 01st April 32,533,653 (16,034,418) (52,398,248) (872,040) (274,881)

Cash and cash equivalents

at 31st March 22,885,563 32,533,653 (16,034,418) (52,398,248) (872,040)

HVA Holdings (Pvt) Ltd

Summary o Balance Sheet as at 31st March 2010

2009/10

Rs.

Cash & cash equivalent 71,705

Total assets 71,705

Capital & reserves

Stated capital 183,700

Retained earnings (117,695)

66,005

Other payables 5,000

Current liabilities 5,000

Total equity & liabilities 71,005




HVA Foods (Pvt) Ltd

Five Year Summary - Financial Ratios & Statement o Changes in Equity

2009/10 2008/09 2007/08 2006/07 2005/06

Financial Ratio

Earnings/(Loss) Per Share 1.17 0.32 (0.35) (0.11) 0.21

(Adjusted) (Adjusted) (Adjusted) (Adjusted) (Adjusted)

Net Assets Per Share 2.15 0.17 (4.70) 6.28 (50.16)

Current Ratio (Times) 1.04 0.92 0.061 0.86 0.67

Statement o Changes in Equity

Stated Revaluation Retained Total

Capital Reserves Earnings

Balance as at 1st April 2005 15,000,020 6,212,450 (106,405,049) (85,192,579)

Prot/(Loss) for the year - - 9,959,393 9,959,393


Surplus/(reversals) on revaluation of property - 89,924,404 - 89,924,404

Prot/(Loss) for the year - - (5,273,481) (5,273,481)

Balance as at 31st March 2007 15,000,020 96,136,854 (101,719,137) 9,417,737

Prot/(Loss) for the year - - (16,463,446) (16,463,446)

Balance as at 31st March 2008 15,000,020 96,136,854 (118,182,583) (7,045,709)


Balance as at 31st March 2009 15,000,020 96,136,854 (103,364,618) 7,772,256Surplus/(reversals) on revaluation of property - 37,864,094 - 37,864,094



The shares of the Company has sub divided into 31 Ordinary shares on 27th September 2010. Therefore, after the sub division

of shares, the total no. of shares at 46,500,062. The ratios were adjusted accordingly. However, these adjustments were not

incorporated in Audited Financial Statements - 31.03.2010. These amendments were incorporated in Interim Financial

Statements - 30.09.2010 and we will be incorporated these disclosures in the Future Financial Statements.

Finance Manager

The above summarised nancial information and its extraction from audited nancial statements, is the

responsibility of the Board of Directors.

Director Director




FINANCIAL STATEMENTS FOR THE YEAR ENDED 31st MARCH 2010

Please note that under Notes to the Financial Statements of 31st March 2010, to be amended in the Future Financial

Statements.

Free hold land was revalued during the nancial year ended 31st March 1998 by Mr. S.D.P. Senadhira, Chartered Valuer.

The surplus on valuation amounted to Rs. 6,212,450/-. Further, free hold land has been valued during the year ended

31st March 2007, by Mr. P.B. Kalugalagedara, Chartered Valuer. The Resulting surpluses was Rs. 69,874,033/- . The free

hold land have been again revalued by Mr. P.B. Kalugalagedara, Chartered Valuer in March 2010. The resulting revaluation

surplus reported amounted to Rs. 22,800,000/-.

Buildings were revalued during the nancial year ended 31st March 2007, by Mr. P.B. Kalugalagedara, Chartered Valuer.

The resulting surpluses was Rs. 20,050,371/- . The building has been again revalued by Mr. P.B. Kalugalagedara, Chartered

Valuer in March 2010. The resulting revaluation surplus reported amounted to Rs. 6,675,857/-.

The carrying amount of revalued assets that would have been included in the nancial statements had the assets been

carried at cost less depreciation is as follows;

Cost 31.03.2010 Cumulative

Depreciation I

assets were carried

at cost 31.03.2010

Net Carrying

Amount 31.03.2010

Net Carrying

Amount 31.03.2009

Freehold Land 15,213,487 - 15,213,487 15,213,487

Buildings 36,314,222 18,424,315 17,889,907 17,845,509




AUDITORS’ REPORT AND

FINANCIAL STATEMENTS

FOR THE YEAR ENDED

31ST MARCH 2010









INCOME STATEMENT

All amounts in Sri Lanka Rupees

For the year ended 31st March 2010 2009Note

Revenue 4 488,206,319 402,379,235Cost of sales (394,722,994) (317,486,619)

Gross prot 93,483,325 84,892,616

Other operating income 5 28,832,656 24,957,801

Distribution expenses (8,367,587) (8,989,701)

Administration expenses (35,673,730) (30,367,280)

Results rom operating activities 6 78,274,664 70,493,436

Finance income 7,238,561 5,928,618

Finance costs (29,925,028) (58,385,691)

Net nance costs 7 (22,686,467) (52,457,073)

Prot beore income tax 55,588,197 18,036,363

Income tax expense 8 (1,313,429) (3,218,398)

Prot or the year 54,274,768 14,817,965

Basic earnings per share 9 36.18 9.88

The Accounting Policies and Notes form an integral part of these Financial Statements.




BALANCE SHEET


As at 31st March 2010 2009Note

ASSETS Property, plant & equipment 10 236,285,570 158,110,838

Total non-current assets 236,285,570 158,110,8

Inventories 11 47,240,322 46,057,609 Trade receivable 12 108,200,440 75,718,573Amount due from related parties 13.a 77,516,294 2,999,663Pre-payments & other receivables 14 11,001,174 11,895,503Income tax receivable 3,702,935 2,194,478Deposits & advances 15 2,174,077 1,106,921Cash & cash equivalents 16.a & b 31,536,243 37,036,929

Total current assets 281,371,485 177,009

Total assets 517,657,055

Equity Stated capital 17 15,000,020 15,000,020Revaluation reserve 18 134,000,948 96,136,854Retained earnings 19 (49,089,851) (103,364,619)

Total equity 99,911,117

LiabilitiesEmployee benets 20 7,164,612 5,910,529Interest-bearing loans and borrowings 21.a 108,316,882 128,678,149Ice tea project - grant 26 29,402,272 -

Deferred tax liabilities 25 1,061,962 1,708,424 Total non-current liabilities 145,945,728 136,297,1

Trade payable 22 33,205,072 21,035,495Amount due to related parties 13.b 16,190,719 1,043,267Interest-bearing loans and borrowings 21.b 175,421,120 134,534,841Deposits & advances payable 23 21,684,380 17,974,979Accrued expenses & other creditors 24 16,648,239 11,959,299Bank overdraft 16.c 8,650,680 4,503,276

Total current liabilities 271,800,210 191,051,

Total liabilities 417,745,938 3

Total equity & liabilities 517,657,055 335,120,514 The Accounting Policies and Notes form an integral part of these Financial Statements.. These nancial statements are prepared in compliance with the requirements of the Companies Act No. 07 of 2007.

Chie Financial Ocer

The board of directors is responsible for the preparation and presentation of these nancial statements.For and behalf of the board.

Director Director30th September 2010Colombo




STATEMENT OF CHANGES IN EQUITY


For the year ended 31st March Stated Revaluation Retained Total

capital Reserves Earnings


Prot for the year - - 14,817,965 14,817,965


Surplus/(reversals) on revaluation of property - 37,864,094 - 37,864,094

Prot for the year - - 54,274,768 54,274,768


The Accounting Policies and Notes form an integral part of these Financial Statements..






NOTES TO THE FINANCIAL STATEMENTS

1. Reporting entity

HVA Foods (Private) Limited ( the “Company”) is acompany domiciled in Sri Lanka. HVA Foods (Pvt)Ltd is a wholly owned subsidiary of HVA Lanka

Exports (Pvt) Ltd., the Company was incorporatedon 22nd August 1997. The Registered Oce of thecompany is located at No. 39 A, Linton Road,Kandana. The principal activity of the company ismanufacturing and exporting of value added tea.

2. Basis of preparation

(a) Statement o compliance

The nancial statements of HVA Foods (Pvt) Ltd

have been prepared in accordance with Sri LankaAccounting Standards (SLAS) laid down by theInstitute of Chartered Accountants of Sri Lanka andthe requirements of the Companies Act No. 07 of 2007.

The nancial statements were authorized for issueby the Board of Directors on 30th September 2010.

(b) Basis o measurement

The nancial statements have been prepared onthe historical cost basis. No adjustments have beenmade for inationary factors in the nancialstatements.

(c) Functional and presentation currency

These nancial statements are presented in the SriLanka rupees, which is the company’s functionalcurrency. All nancial information presented in SriLanka rupees has been rounded to the nearestrupee.

(d) Use o estimates and judgments The preparation of nancial statements inconformity with SLASs requires management tomake judgments, estimates and assumptions thataect the application of policies and reportedamounts of assets and liabilities, income andexpenses. The estimates and associatedassumptions are based on historical experience andvarious other factors that are believed to bereasonable under the circumstances, the results of which form the basis of making the making the

judgments about carrying values of assets andliabilities that are not readily apparent from othersources. Actual results may dier from these

estimates.

The estimates and underlying assumptions arereviewed on an ongoing basis. Revisions toaccounting estimates are recognised in the period

in which the estimate is revised if the revisionaects only that period or in the period of therevision and future periods if the revision aectsboth current and future periods.

3. Signicant accounting policies

The accounting policies set out below have beenapplied consistently to all periods presented inthese nancial statements, and have been appliedconsistently by the company.

(a) Foreign currency

(i) Foreign currency transactions

Transactions in foreign currencies are translated tothe respective functional currency at exchangerates at the dates of the transactions. Monetaryassets and liabilities denominated in foreigncurrencies at the reporting date are retranslated tothe functional currency at the foreign exchangerate at that date. Foreign exchange dierencesarising on translation are recognized in prot or

loss.

(b) Change in accounting policies

The accounting policies adopted are consistentwith those used in the previous nancial year.

(c) Property, plant and equipment

(i) Recognition & measurement

Items of property, plant and equipment aremeasured at cost less accumulated depreciation

and accumulated impairment losses. Cost includesexpenditure that is directly attributable to theacquisition of the asset. The cost of self-constructedassets includes the cost of materials and directlabour, any other costs directly attributable tobringing the assets to a working condition for itsintended use, and the costs of dismantling andremoving the items and restoring the site on whichthey are located.

When parts of an item of property, plant andequipment have dierent useful lives, they are

accounted for as separate items (majorcomponents) of property, plant and equipment.




Gains and losses on disposal of an item of property, plant and equipment are determinedby comparing the proceeds from disposal withthe carrying amount of property, plant and arerecognized net within “other income” in prot orloss. When re-valued assets are sold, the amountsincluded in the revaluation surplus reserve are

transferred to retained earnings.

(ii) Subsequent costs

The Company recognizes in the carrying amountof an item of property, plant and equipment thecost of replacing part of such an item when thatcost is incurred if it is probable that the futureeconomic benets embodied with the item willow to the company and the cost of the itemcan be measured reliably. All other costs arerecognized in the income statement as anexpenses as incurred.

(iii) Deprecation

Depreciation of property, plant & equipment of the company is provided for on a consistentbasis, over the period appropriate to theestimated useful lives of the assets. Generallyassets are written o on a straight-line methodover the following periods.

Building 20 yearsMotor Vehicles 04 yearsStores Equipments 04 years

Furniture & Fittings 10 yearsPlant & Machinery 04 yearsComputers 04 yearsSoftware Packages 04 years

Tea room equipments 04 years

Depreciation for all property, plant andequipment are provided proportionately in themonth of purchase and in the month of disposalof the assets.

Revaluation

Revaluation has been performed on freeholdland and buildings by professionally qualiedvaluer using the market value method in the yearended 31/03/2010. The surplus is recognized onthe net carrying value of the asset and istransferred to a revaluation reserve after restatingthe asset at the revalued amount. The companyrevalues land and buildings at least once in veyears which is stated at its fair value at the date of revaluation less any subsequent impairment loss.

(iv) Leased assets

Leases in terms of which the company assumessubstantially all the risks and rewards of ownership are classied as nance leases. Upon

initial recognition the leased asset is measured atan amount equal to the lower of its fair value andthe present value of the minimum leasepayments. Subsequent to initial recognition, theasset is accounted for in accordance with theaccounting policy applicable to that asset.

Other leases are operating leases and, are notrecognized on the company’s Balance sheet.

(d) Inventories

Inventories are stated at the lower of cost and netrealizable value. Net realizable value is theestimated selling price in the ordinary course of business, less the estimated costs of completionand the estimated cost necessary to make thesale. The cost of inventories is based on theWeighted – Average Cost principle and includes

expenditure incurred in acquiring the inventoriesand bringing them to their existing location andcondition. In the case of manufacturedinventories and work in progress, cost includesan appropriate share of overheads based onnormal operating capacity.

(e) Trade and other receivable

Trade receivables are stated at the amounts theyare estimated to be realized net of provisions forbad and doubtful receivables.

Other receivables and dues from related partiesare recognized at cost less provision for bad anddoubtful receivables.

() Impairment

The carrying amounts of the company’s non-nancial assets, other than inventories anddeferred tax asset are reviewed at each reportingdate to determine whether there is anyindication of impairment. If any such indication

exists, then the asset’s recoverable amount isestimated.

The recoverable amount of an asset or cash-generating until is the greater of its value in useand its fair value less costs to sell. In assessingvalue in use, the estimated future cash ows arediscounted to their present value using a pre-taxdiscount rate that reects current marketassessments of the time value of money and therisks specic to the asset. For the purpose of impairment testing, assets are grouped together

into the smallest group of assets that generatescash inows from counting use that are largelyindependent of the cash inows of other assets




or groups of assets (the “cash-generating unit”)

An impairment loss is recognized if the carryingamount of an asset or its cash-generating unitexceeds its estimated recoverable amount.

Impairment losses are recognized in prot or loss.Impairment losses recognized in respect of cash-generating units are allocated rst to reducethe carrying amount of any goodwill allocated tothe units and then to reduce the carryingamount of the other in the unit (group of units)on a pro rate basis.

(g) Employee benets

(i) Dened contribution plans

The Company contributes 12% and 3% of salary

to the Employees Provident Fund and Employees Trust Fund respectively, in terms of EPF Act No15of 1958 as amended and to Employers Trust Fundin terms of the ETF Act No.46 of 1980 asamended.

(ii) Dened benet plans

Provision has been made for retirement gratuitiesfrom the rst year of service for all employees inconformity with the SLAS 16. However under thePayment of Gratuity Act No. 12 of 1983, theliability to an employee arises only oncompletion of 5 years of continued services.

The liability is not externally funded, nor actuallyvalued. The Gratuity Liability is valued usingGratuity Formula method as required by therevised Sri Lanka Accounting Standard No.16 -Employee Benets.

(h) Provisions

A provision is recognized when the company hasa present obligation (legal or constructive) as a

result of a past event, where it is probable that anoutow of recourses embodying economicbenets will be required to settle the obligationand a reliable estimate can be made of thequantum of the outow.

(i) Government grants

A Government grant is recognized in the balancesheet initially as deferred income when there is areasonable assurance that it will be received andthe conditions attached to it are complied with.

Grants that compensate the company forexpenses incurred are recognized as revenue inthe income statement on a systematic basis in

the periods in which the expense is incurred.Grants that compensate the company for thecost of an asset are recognized in the incomestatement as revenue on a systematic basis overthe useful life of the asset.

(i) Revenue

(i) Goods sold

Revenue from the sale of goods is recognized inthe income statement when the signicant risksand rewards of ownership have been transferredto the buyer. No revenue is recognized if thereare signicant uncertainties regarding recovery of the consideration due, associated costs or thepossible return of goods also continuing

management involvement with the goods.(ii) Interest Income

Interest income recognized as it accrues in protor loss.

(iii) Dividend income

Dividend income is recognized in the incomestatement on the date that the entity`s right toreceive payments is established.

(j) Cash and cash equivalents

Cash and cash equivalents are dened as cash inhand, demand deposits and short-term highlyliquid investments, readily convertible to knowamounts of cash and subject to insignicant risk of changes in valve. For the purpose of cash owstatement, cash and cash equivalents consist of cash in hand and deposits in banks net of outstanding bank overdrafts. Investments withshort maturities i.e. three months or less from thedate of acquiescing are also treated as cashequivalents.

(k) Taxation

(i) Income Tax

The provision for income tax is based on theelements of income & expenditure as reported inthe nancial statements and computed inaccordance with the provisions of the InlandRevenue Act No.10 of 2006 and amendmentsthere to.

The company enjoys a concessionary tax rate for

20 years from 1997 due to a BOI agreement.(ii) Deferred tax

Deferred tax is recognized using the balance





sheet liability method, providing for temporarydierences between the carrying amounts of assets and liabilities for nancial reportingpurposes and the amounts used for taxationpurposes. Deferred tax is not recognized for thefollowing temporary dierences: the initialrecognition of assets or liabilities in a transaction

that is not a business combination and thataects neither accounting nor taxable prot, anddierences measured at the rates that areexpected to be applied to the temporarydierences when they reverse, based on the lawsthat have been enacted or substantively enactedby the balance sheet date.

A deferred tax asset is recognized to the extentthat it is probable that future taxable prots willbe available against which the temporarydierences can be utilized. Deferred tax assets arereviewed at each balance sheet date and arereduced to the extent that it is no longerprobable that the related tax benet will berealized.

(iii) Economic service charge

As per the provisions of the Economic ServiceCharge Act No 13 of 2006, Economic Service(ESC) is payable on the liable turnover at specicrates. ESC is deductible from the income taxliability. Any unclaimed liability can be carriedforward and set o against the income taxpayable as per the relevant provisions in the Act.

(iv) Social responsibility Levy

As per the provisions of the Finance Act No 5 of 2005, as amended by the Finance Act No 11 of 2006, Social Responsibility Levy (SRL) wasintroduced with eect from 01st January 2005.SRL is payable at the rate of 1.5% on all taxes andlevies chargeable.

(l) Trade and other payables

Trade and other payables are stated at their cost.

(m) Expenses

(i) Expenses recognition

Expenses are recognized in the incomestatement on the basis of a direct associationbetween the cost incurred and earning of specic item of income. All expenditure incurredin the running of the business and in maintainingthe property, plant & equipment in state of

eciency has been charged to revenue inarriving at the prot for the year.

(ii) Finance lease payments

Minimum lease payments are apportionedbetween the nance charge and the reduction of the outstanding liability. The nance charge isallocated to each period during the lease term soas to produce a constant periodic rate of interest

on the remaining balance of the liability.(iii) Finance income & expenses

Finance income comprises interest income onfunds invested. Interest income is recognized as itaccrues in prot or loss.

Finance expenses comprise interest expenses onborrowings, bank charges and debit tax.

All borrowing costs are recognized in prot orloss.

Foreign currency gains and losses are reported

on a net basis.

(n) Earnings/(loss) per share

The group presents basic earnings per share (EPS)data for its ordinary shares. Basic EPS is calculatedby dividing the prot or loss attributable toordinary shareholders of the company by theweighted average number of ordinary sharesoutstanding during the period.

(o) Comparative inormationWherever necessary comparative gures arereclassied to conrm to the changes inpresentation in the current year and disclosed asnotes to the nancial statements.

(p) Cash ow statement

The cash ow of the company has beenpresented in using “indirect method” inaccordance with SLAS-09 (cash ow statement)

(q) Events occurring ater the balance sheet date

All material post balance sheet events have beenconsidered and where appropriate adjustmentsor disclosures have been made in respectivenotes to the nancial statements.

(r) Contingent liabilities

Contingencies are possible assets or obligationsthat arise from a past event and would be

conrmed only on the occurrence or non-occurrence of uncertain future events, which arebeyond the company’s control.




NOTES TO THE FINANCIAL STATEMENTS (Contd.)


2010 2009

4 RevenueExport sales 461,489,725 380,307,385

Local sales 26,716,594 22,071,850488,206,319 402,379,235

5 Other operating incomeSale of bin tea & dust 802,283 1,294,505Brand promotion incentive 297,937 -Packing income 27,428,218 21,754,558Gain on sale of property plant & equip. - (27,878)Other income 304,218 805,444Insurance claim - (4,821)Receivable/(payable) written o/(back) - 1,135,993

28,832,656 24,957,801

6 Result rom operating activities The result from operating activities is after charging all expenses including following,Auditors’ remuneration 300,000 290,000Receivable/(payable) written o/(back) 3,759,784 -Provision for slow moving inventories 1,474,473 421,787Legal expenses 382,558 211,714Provision for gratuity 1,438,631 1,309,287Salaries & wages 11,943,503 15,970,155EPF 1,392,706 1,114,036

ETF 348,227 284,629Bonus & incentive 620,486 394,500

7 Finance income and expenseFinance incomeInterest income 2,373,047 4,080,066Interest from debtors 2,931,126 1,848,552Foreign exchange gain 1,934,388 -

7,238,561 5,928,618

Finance costsLoan interest - packing credit (4,344,913) (3,219,842)

Loan interest - term loan (8,979,346) (6,395,414)Interest - Lake drive holdings (Pvt) Ltd. (194,255) (109,655)Interest on lease rentals (875,736) (1,626,001)Interest on bill discounts (8,703,599) (5,884,475)Over due interest (1,057,032) (1,907,548)Bank overdraft interest (1,802,810) (2,829,233)Bill discount charges (1,361,892) (1,192,094)Factoring charges (260,251) (85,239)Bank charges (2,345,194) (2,601,340)Foreign Exchange loss - (32,534,850)

(29,925,028) (58,385,691)

Net nance costs (22,686,467) (52,457,073)






2010 2009

8 Income tax expense8.a Current income tax

Current tax charges 2,090,391 1,602,511(Over) / under provision of previous year (130,500) (92,537)

1,959,891 1,509,974Deferred taxDeferred tax charge / (reversal) (Note-25) (646,462) 1,708,424

Income tax for the year 1,313,429 3,218,398

8.b Reconciliation o accounting prot to tax expensesBusiness prot / (loss) before tax 55,588,197 18,036,363Exempt Income (56,521,908) (5,965,500)Aggregate disallowable expenses 24,590,992 13,726,629

Aggregate allowable expenses (9,517,640) (9,604,370)Taxable prot / (loss) for the year 14,139,641 16,193,122

Tax losses brought forward (87,650,906) (93,317,724)Utilization of tax losses 4,948,874 5,667,593

Tax losses carried forward (82,702,032) (87,650,131)

Total statutory income 14,139,641 16,193,122Deductions; utilization of tax losses (4,948,874) (5,667,593)

Taxable income - other source of income 9,190,767 10,525,529

Concessionary rate @ 15% 867,952 1,524,159

Standard rate 1,191,547 54,670SRL @ 1.5% 30,892 23,682

Total current tax for the year 2,090,391 1,602,511

HVA Foods (Pvt) Ltd in the terms of the principal agreement entered in to with the Board of Investment(BOI) of Sri Lanka BOI Law No.04 of 1978 is liable to income tax at 15% of its taxable prot for a period of 20years commencing from 1997.

Social responsibility levy has been charged at the rate of 1.5% on the income tax liability in terms of theSocial Responsibility Levy Act No.05 of 2005.

The company has tax losses amounting to Rs.82,702,032/- (2009-Rs. 87,650,131/-) as at 31/03/2010.

Deferred tax has been computed using the current eective tax rates applicable to company.

9 Basic earnings / (loss) per share The calculation of basic loss per share was based on the loss attributable to ordinary shareholders andweighted average number of ordinary shares outstanding during the year.

2010 2009

Prot for the year 54,274,768 14,817,965Weighted average number of ordinary shares 1,500,002 1,500,002

Basic earning per share 36.18 9.88






10 Property, plant & equipment

Cost/valuation (Rs.) As at Additions Revaluation As at01-04-2009 / Transer during the year 31-03-2010

Free hold assetsLand 91,300,000 - 22,800,000 114,100,000Buildings 56,317,658 46,735 6,675,857 63,040,250Motor vehicle 182,868 40 - 182,908Machinery 29,032,154 802,399 - 29,834,553Stores equipment 2,637,460 14,585 - 2,652,045Oce equipment 2,604,431 251,453 - 2,855,884Furniture and ttings 577,561 31,576 - 609,137Name board - 119,234 - 119,234Software equipments 644,855 - - 644,855Capital-work-in-progress - 50,185,559 - 50,185,559

183,296,987 51,451,580 29,475,857 264,224,424

Lease hold assets Motor vehicle 6,319,154 - - 6,319,114Machinery 11,435,748 - - 11,435,748

17,754,902 - - 17,754,862

Total cost / valuation 201,051,889 51,451,580 29,475,857 281,979,286

Accumulated depreciation (Rs.) As at Depreciation Revaluation As at01-04-2009 or the year during the year 31.03.2010

Free hold depreciationBuildings 5,572,354 2,815,883 (8,388,237) -

Motor vehicles 98,772 45,726 - 144,498Machinery 21,443,502 3,178,531 - 24,622,033Stores equipment 1,670,631 661,381 - 2,332,012Oce equipments 1,603,277 605,331 - 2,208,608Furniture and ttings 150,434 58,950 - 209,384Name board - 170 - 170Software equipments 452,652 161,214 - 613,866

30,991,622 7,527,187 (8,388,237) 30,130,572

Lease hold depreciation Motor vehicles 3,225,597 1,579,778 - 4,805,375Machinery 8,723,832 2,033,937 - 10,757,769

11,949,429 3,613,715 - 15,563,144Total accumulated depreciation 42,941,051 11,140,902 (8,388,237) 45,693,716

Carrying amount 158,110,838 236,285,570

Assets pledged as security against borrowings are disclosed in note no.31.The details of freehold land and buildings which are stated at revalued amounts are as follows.

Company property Method o Date o Amount Valuervaluation valuation Rs.

1. Land situated at Market value 31-03-2010 Rs.114,100,000/- Mr. P.B. KalugalagedaraLinton Road, Kandana

2. Building situated at Market value 31-03-2010 Rs.63,040,250/- Mr. P.B. KalugalagedaraLinton Road, Kandana






2010 2009

11 InventoriesRaw material - Tea 16,872,187 16,931,376

Raw material-ice tea concentrate & fruit base 1,450,544 1,810,336Flavours 3,203,106 4,911,704Packing materials 22,986,545 21,197,957Work in progress 3,045,880 36,089Finished goods 1,358,108 3,091,934Others 506,233 -

49,422,603 47,979,396

Provision for slow moving inventories (2,182,281) (1,921,787)

47,240,322 46,057,609

12 Trade receivables

Trade debtors 109,005,164 76,443,906Provision for doubtful debts (Note-12.a) (804,724) (725,333)

108,200,440 75,718,573

12.a Provision or doubtul debtsBalance as at 01st April 725,333 1,719,578Reversals of provisions during the year - (1,013,999)Provisions made during the year 79,391 19,754

Balance as at 31st March 804,724 725,333

13 Amount due rom / due to related party

13.a Amount due rom related parties RelationshipHVA Farm (Pvt) Ltd Common Directors - 583,630HVA Beverage (Pvt) Ltd Common Directors - 151,576HVA Lanka Exports (Pvt) Ltd Parent Company 77,516,294 2,264,457

77,516,294 2,999,663

13.b Amount due to related partiesRelationship

Lake Drive Holdings (Pvt) Ltd Common Directors 9,609,746 1,043,267Mrs. V.S.A. Fernando Director 6,580,973 -

16,190,719 1,043,267

14 Prepayments & other receivablesVAT receivables 8,940,944 8,974,857ESC - 434,338W.H.T. - 93,052NBT receivables 489,213 -Insurance pre-payments 228,598 230,518Lease pre-payments 351,005 351,005Others deposits & pre-payments 991,414 1,811,733

11,001,174 11,895,503






2010 2009

15 Deposits & advancesAdvance 1,590,336 523,180

Refundable deposits 83,741 83,741Deposits 500,000 500,000

2,174,077 1,106,921

16 Cash and cash equivalents16.a Short term deposits

HSBC FD 500,000 764,192Seylan bank FD 19,132,946 18,555,199Bank of Ceylon - Fixed Deposits 4,894,604 9,913,295Seylan bank exports bills S/A-044 800,932 1,342,620BOC exports bills 902,506 -

Seylan bank exports bills margin A/C 3,510,981 2,765,92629,741,969 33,341,232

16.b Favourable balancesHSBC 001-544097-025 USD FEC 274,590 1,216HSBC 001-022787-101 USD FCBU 835,745 6,034HSBC 001-544097-026 EUR EFC 3,684 109,554HNB LKR A/C-0807010006412 16,472 186,905BOC -USD - DFC - 9519983 627,591 -Seylan bank-086401310140041USD EFC 9,509 1,643,361Seylan bank-086401310140043EUR EFC 485 476

Seylan bank FCBU A/C-001 - 2,379Seylan bank LKR A/C -001 - 1,713,454Sampath bank LKR A/C-100 5,527 5,527Cash in hand & cheques in hand 20,671 26,791

Total favourable balances 1,794,273 3,695,697

Total short term deposits & favourable balances 31,536,243 37,036,929

16.c Unavourable balances/overdratsHSBC-001544097001-LKR 445,354 505,529Nations Trust Bank 5281 900 -BOC-7630603-LKR 3,878,433 3,997,748

Seylan bank-086401310140001-LKR 4,279,949 -Seylan bank991300090773001-USD-FCBU 46,043 -

Total unfavourable balances 8,650,680 4,503,277

Cash and cash equivalents in the cash ow statement 22,885,563 32,533,652

17 Stated capital1,500,002 ordinary shares 15,000,020 15,000,020

15,000,020 15,000,020








2010 2009

21.b Amount payable with in one yearBill discounting 86,704,972 71,152,698

Packing credit Loans 61,449,574 44,891,332Payable within one year 27,266,574 18,490,811

175,421,120 134,534,841

22 Trade payable Tea creditors 249,170 Packing material creditors 30,791,512 19,871,407Flavor creditors 1,896,806 653,261Other creditors 267,584 270,634

33,205,072 21,035,495

23 Deposits & advances payableDebtors advance 4,517,989 598,094Deposits from debtors 17,106,930 17,301,923Other deposits & advances 59,461 74,961

21,684,380 17,974,978

24 Accrued expenses & other creditorsSalary and related expenses payables 1,772,481 1,025,265ESC payable 2,522,903 78,017NBT - 23,265Custom duty payables 56,273 47,466Freight creditors 1,785,212 1,728,566

Interest payables 203,836 188,613Other payables 10,307,534 8,868,107

16,648,239 11,959,299

25 Deerred tax assetsDeferred tax assetsRetiring gratuity (215,795) (516,824)

Deferred tax liabilityAccelerated depreciation for tax purposes 1,277,757 2,225,248

Net deferred tax liability 1,061,962 1,708,424

The gross movement on the deerred income taxBalance as at 1st April 1,708,424 -Provision/(reversal) made during the year (646,462) 1,708,424

Balance as at 31st March 1,061,962 1,708,424

Deferred tax asset of Rs. 12,405,305/- (2009-Rs. 13,147,520/-) on carried forward losses of Rs.82,708,043/-(2009-Rs. 87,650,131/-) has not been recognized due to uncertainty.

26 Government grantsReceipts during the year 29,402,272 -

Balance carried forward 29,402,272 -

The Asian Development Bank oered a grant of Rs. 40,793,651/- on 30/09/2009 to construct an ice tea plant.






27 Related parties

27.1 Transactions with key management personnel.Key management personnel include all the members of the Board of directors of the company havingauthority and responsibilities for planning , directing and controlling the activities of the company.

2010 2009

27.2 Key management personnel compensationKey management personnel compensation comprised,Short- term employee benets including salaries 7,306,800 7,582,673

27.3 Key management personnel and director transactionsDirectors of the company control 100% of the voting shares of the company. Following directors are alsodirectors of HVA Lanka Exports (Pvt) Ltd,

Name o the director,Mr.A.R.H.FernandoMs.V.A Fernando

The aggregated value of transactions and outstanding balances relating to key management personnelwere as follows;

Director Transaction Transaction value Outstanding value2010 2009 2010 2009

Ms. V.S.A.Fernando Loan obtained fromthe Director

(Interest rate is 8% p.a) 5,000,000 - 5,000,000 -

Interest Accrued 1,580,793 - 1,580,793 -

27.4 Transactions with group companies and director transactions

Company Relationship Nature o transaction Transaction Value (Rs.)2010 2009

HVA Lanka Exports (Pvt) Ltd. Common Directors Sale o goods From subsidiary to parent 18,088,049 10,179,594From parent to subsidiary 16,006,323 11,158,106

Expenses & other transactions From subsidiary to parent 239,144,875 318,850,728From parent to subsidiary 165,975,009 257,878,096

HVA Farms (Pvt) Ltd Common Directors Reimbursement of expenses 262,570 64,535Receivable written o 846,201 -

Lake Drive Holdings(Pvt) Ltd Common Directors Transport charges 1,208,318 785,445Interest expenses 194,255 109,655

HVA Beverage (Pvt) Ltd. Common Directors Receivable written o 156,576 -






28 Financial arrangements or continuous operationsSeylan Bank has made the following arrangements in HVA Foods (Pvt) Ltd with eect from 01st June 2008which will enable the company to continue in business.

a. Converted all Seylan Bank Rupee and Foreign Currency Term Loans to one restructured Foreign CurrencyLoan at an interest rate of 04% per annum with a one year grace period on capital re-payment.

b. Transferred Hard Core of Packing Credit Loans and Bills Discounted balances to the same restructuredForeign Currency Term Loan.

c. This Restructured Foreign Currency Term Loan is amounting Rs 126 Mn.(USD 1,170,000 /-) at 07% per annumrepayable in four years with one year grace period.

29 Events ater the balance sheet dateNo events identied since the balance sheet date, which may require a disclosure or an adjustment in thenancial statements.

30 Commitment & contingencies The company has contingent liabilities on behalf of the following companies.

Company name Bank Guarantee Amount (Rs.)

HVA Lanka Exports (Pvt) Ltd Lankaputhra Primary mortgage 130 Mn

Development Bank -Land,building and machinery

HVA Lanka Exports (Pvt) Ltd HSBC Corporate guarantee 26.9 Mn

HVA Lanka Exports (Pvt) Ltd HSBC Issuance of guarantee 0.5 Mn

31 Assets pledged as securitiesThe following assets of the company have been pledged as securities for liabilities as at the balance sheet date.

Bank Nature o the assets Nature o the liability Amount o.Securities Rs.

Seylan Bank Land and Factory Building Term Loan, Packing 34 Mn

Credit Loans, Export Bill,O/D

Seylan Bank Stocks and packing materials Term Loan, Packing 64.6 Mn

Credit Loans, Export Bill,O/DHSBC Stocks and packing materials Term Loan, Export Bill 26.9 Mn

32 Comparative inormationNo comparative information has been reclassied during the year.

33 Directors responsibilityThe board of directors takes the responsibility for the preparation and presentation of these nancial statementsin accordance with Companies Act No. 07 of 2007 and Sri Lanka Accounting Standards.

34 No o employeesThe total number of employees of the company as at 31st March 2010 - 87 (as at 31st March 2009 - 92).




DETAIL INCOME STATEMENT


For the year ended 31st March 2010 2009

Revenue 488,206,319 402,379,235Raw material consumed Raw material as at 01st April 44,851,373 33,913,668Add: Raw Material purchases 353,094,219 283,398,126Less: Stock written o (1,827,517) (1,493,917)

396,118,075 315,817,877Less: Raw material as at 31st March (44,512,381) (44,851,373)

Raw Material consumed during the year 351,605,694 270,966,504Add: Work in progress as at 01st April 36,089 1,837,224Less: Work in progress as at 31st March (3,045,880) (36,089)

348,595,903 272,767,639

Direct expensesCustom duty 2,306,880 2,042,703Freight charges 8,726,504 8,300,539Inspection charges 734,476 362,375 Transport charges 873,991 Export expenses 880,723 497,657Insurance on export 322,880 280,199Salary - factory 2,562,274 2,213,531Executive sta Salary - factory 293,494 290,030Over time - factory sta 1,881,219 1,462,645Casual wages 1,138 142,778

Over time - casual workers - 140,739Allowance - factory 59,586 223,738Executive sta allowance - factory 28,350 23,940E.P.F. -factory 311,906 251,676E.P.F. -executive factory 35,021 34,804E.T.F. -factory 77,976 62,979E.T.F. -executive factory 8,805 8,702E.P.F. -casual - 14,610E.T.F. -casual - 3,653E.P.F arrears expenses - 192,000Incentive / bonus 620,486 98,625Gratuity 67,496 188,349

Sta welfare 263,225 70,632Insurance - Factory 139,975 71,890Electricity 1,224,981 948,440Factory equipment maintenance 4,162 -Import expenses 171,115 1,082,102Maintenance of factory 295,875 305,939Maintenance of machinery 625,099 361,086Depreciation 5,873,850 2,479,950Machinery hiring charges 250,919 123,500Meals for factory workers 293,933 207,123Uniform for factory sta 57,165 -

Customs license(C.H.A) renewal charges - 15,275




DETAIL INCOME STATEMENT (Contd.)



Direct Expenses (contin…)

Storage charges 303,383 347,795Packing charges 13,211,312 9,042,672PAL on imports 35,543 184,539Ice tea production expenses 253,635 779,712SLECIC - premium charges 677,394 276,479Other consumption (257,240) - Tea collection & tea room charges 686,509 810,792Medical consultation 11,250 11,780Vehicle hiring charges 141,750 114,000Fuel charges 70,200 59,280Security charges 266,025 197,581

Total direct expenditure 44,393,265 35,064,27

392,989,169 307,831,913

Add: Finished Goods as at 01st April 3,091,934 12,746,640Less: Finished Goods as at 31st March (1,358,108) (3,091,934)

Cost o sales 394,722,994 317,486,619

Gross prot 93,483,325 84,892,616Other income 28,832,656 24,957,801

122,315,982 109,850,417Less: Expenditure Distribution expenses Advertising 98,559 175,272

Commission on sales 1,104,125 1,409,943Business promotion expenses 3,491,922 3,139,548 Traveling expenses 21,051

Courier charges 386,966 463,133Bad debts 71,150 91,817Provision for bad debts 288,199 19,754Local sales incentives 20,711 171,451Foreign travels 1,543,580 1,626,496Sales promotion expenses 135,658 73,159 Trade Mark Registration 592,129 264,2Damage stock written o 613,538 1,493,917

Total distribution expenses 8,367,587 8,989,70






DETAIL INCOME STATEMENT (Contd.)



Finance Income

Interest income 2,373,047 4,080,066Interest from debtors 2,931,126 1,848,552Gain on exchange rate uctuation 1,934,388 -

7,238,561 5,928,618Finance Expenses Loan interest - packing credit 4,344,913 3,219,842Loan interest - term loan 8,979,346 6,395,414Interest - Lake drive holdings (Pvt) Ltd. 194,255 109,655Interest on lease rentals 875,736 1,626,001Interest on bill discounts 8,703,599 5,884,475Over due interest 1,057,032 1,907,548Bank overdraft interest 1,802,810 2,829,232Bill discount charges 1,361,892 1,192,094Factoring charges 260,251 85,239Bank charges 2,345,194 2,601,340Loss on exchange rate uctuation - 32,534,850

29,925,028 58,385,691

Net nance expense 22,686,467 52,457,072

Total expenditure (66,727,784) (91,814,052)

Prot beore taxation 55,588,197 18,036,363

Income tax expenses (1,313,429) (3,218,398)

Prot or the year 54,274,768 14,817,965




INTERIM

FINANCIAL STATEMENTS

FOR THE PERIOD ENDED

30TH SEPTEMBER 2010







HVA FOODS (PVT) LIMITED

INCOME STATEMENT


Group Company

Year ended

For the six months period ended 30.09.2010 30.09.2010 30.09.2009 31.03.2010Note (Reviewed) (Reviewed) (Unaudited) (Audited)

Revenue 4 285,220,778 285,220,778 252,133,381 488,206,319

Cost of sales (236,559,871) (236,559,871) (211,561,406) (394,722,994)

Gross prot 48,660,907 48,660,907 40,571,975 93,483,325

Other income 5 26,211,981 26,211,981 18,899,123 28,832,656

Distribution expenses (7,486,146) (7,486,146) (5,266,180) (8,367,587)

Administration expenses (34,492,265) (34,492,265) (24,904,326) (35,673,730)

Results rom operating activities 6 32,894,477 32,894,477 29,300,592 78,274,664Finance income 11,060,022 11,060,022 2,598,233 7,238,561

Finance costs (14,310,351) (14,310,351) (15,331,290) (29,925,028)

Net nance costs 7 (3,250,329) (3,250,329) (12,733,057) (22,686,467)

Prot beore income tax 29,644,148 29,644,148 16,567,535 55,588,197

Income tax expense 8 (2,576,526) (2,576,526) - (1,313,429)

Prot or the year 27,067,622 27,067,622 16,567,535 54,274,768

Basic earnings per share 9 0.58 0.58 0.36 1.17








STATEMENT OF CHANGES IN EQUITY


For the six months period ended

Consolidated

Attributable to equity holders o the company

Stated Revaluation Retained Total Non-controlling Total

capital reserves earnings interest equity

Balance as at 01st April 2010 15,000,020 134,000,948 (49,089,851) 99,911,117 - 99,911,117

Eect of acquistions 3 3

Prot for the period - - 27,067,622 27,067,622 - 27,067,622

Balance as at 30th September 2010 15,000,020 134,000,948 (22,022,229) 126,978,739 3 126,978,742

Company

Stated Revaluation Retained Total

capital reserves earnings

Balance as at 01st April 2009 15,000,020 96,136,854 (103,364,619) 7,772,255

Prot for the period - - 16,567,535 16,567,535

Unaudited balance as at 30th September 2009 15,000,020 96,136,854 (86,797,084) 24,339,790

Surplus/(reversals) on

revaluation of property - 37,864,094 - 37,864,094




Balance as at 30 th September 2010 15,000,020 134,000,948 (22,022,229) 126,978,739






CASH FLOW STATEMENT


Group Company

Year ended

For the six months period ended 30.09.2010 30.09.2010 30.09.2009 31.03.2010(Reviewed) (Reviewed) (Unaudited) (Audited)

Cash ow rom operating activities Prot before taxation 29,644,148 29,644,148 16,567,535 55,588,197Adjustments for:Depreciation 4,353,609 4,353,609 5,759,517 11,140,902Provision for gratuity 1,010,250 1,010,250 1,014,138 1,438,631Provision for slow moving inventories 504,898 504,898 - 1,474,473Provision for bad debts - - - 288,199Interest expenses 12,546,720 12,546,720 13,100,838 25,957,692Prot on disposal of property, plant and equipment (1,731,402) (1,731,402) - -

46,328,223 46,328,223 36,442,028 95,888,094

Change in: - Inventories 3,998,710 3,998,710 9,451,244 (2,657,186)- Trade receivables (981,683) (981,683) (47,493,634) (32,770,067)- Prepayments & other receivables 1,353,542 1,353,542 (5,681,310) 892,510- Amount due from related party (30,461,482) (30,461,482) (12,488,627) (74,516,631)- Deposits & advances receivables (1,486,410) (1,486,410) (2,166,911) (1,289,223)- Trade payables (6,253,922) (6,253,922) 5,888,583 12,169,577- Amount due to related party (3,096,716) (3,096,716) (431,296) 15,147,452- Deposits & advances payables (131,539) (131,539) 821,192 3,709,401- Accrued expenses & other creditors 7,743,305 7,733,305 4,974,393 4,688,940

Cash generated/(used in) from operating activities 17,012,026 17,002,027 (10,684,337) 21,262,868

Interest paid (12,111,561) (12,111,561) (13,100,838) (25,735,624)Gratuity paid (167,741) (167,741) (60,700) (184,548)Income tax paid (1,590,187) (1,590,187) 503,509 (3,466,529)Net cash rom/ (used in) operating activities 3,142,537 3,132,538 (23,342,366) (8,123,833)

Cash ows rom investing activities Acquisition of property, plant and equipment (8,853,082) (8,853,082) (1,240,621) (51,451,541)Acquisition of subsidiary, net of cash acquired 61,006 - - -Proceeds from sale of property, plant and equipment 7,698,611 7,698,611 - -

Net cash used in investing activities (1,093,465) (1,154,471) (1,240,621) (51,451,541)

Cash ows rom nancing activities Ice tea project-grant - - 2,120,187 29,402,272Change in nance lease liabilities 1,450,044 1,450,044 (1,669,030) (3,655,021)

Change in bank borrowings (6,014,376) (6,014,376) 18,715,218 24,180,033Net cash ows rom nancing activities (4,564,332) (4,564,332) 19,166,375 49,927,284

Net decrease in cash and cash equivalents (2,515,259) (2,586,264) (5,416,612) (9,648,090)Cash and cash equivalents at 01st April 22,885,563 22,885,563 32,533,653 32,533,653

Cash and cash equivalents as at the end o the period (Note A) 20,370,303 20,299,298 27,117,041 22,885,563

Note A -Cash and cash equivalents

Cash in hand and cash at banks 38,011,931 37,940,926 37,689,573 31,536,243

Bank overdrafts (17,641,628) (17,641,628) (10,572,532) (8,650,680)

Cash and cash equivalents at end o the period 20,370,303 20,299,298 27,117,041 22,885,563






1. Reporting entity

HVA Foods (Pvt) Limited (the “Company”) is acompany domiciled in Sri Lanka. HVA Foods (Pvt) Ltdis a wholly owned subsidiary of HVA Lanka Exports

(Pvt) Ltd. The Company was incorporated on 22ndAugust 1997. The Registered Oce of the company islocated at No. 39 A, Linton Road, Kandana. Theprincipal activity of the company is manufacturingand exporting of value added tea.

2. Basis of preparation

(a) Statement o compliance

The interim nancial statements of HVA Foods (Pvt)

Limited have been prepared in accordance with SriLanka Accounting Standards (SLASs) laid down by theInstitute of Chartered Accountants of Sri Lanka andthe requirements of the Companies Act No. 07 of 2007.

The interim nancial statements were authorized forissue by the Board of Directors on 19th November2010.

(b) Basis o measurement

The nancial statements have been prepared on thehistorical cost basis.

No adjustments have been made for inationaryfactors in the nancial statements.

(c) Functional and presentation currency

These nancial statements are presented in the SriLanka rupees, which is the company’s functionalcurrency. All nancial information presented in SriLanka rupees has been rounded to the nearest rupee.

(d) Use o estimates and judgments

The preparation of nancial statements in conformitywith SLASs requires management to make judgments, estimates and assumptions that aect theapplication of policies and reported amounts of assetsand liabilities, income and expenses. The estimatesand associated assumptions are based on historicalexperience and various other factors that are believedto be reasonable under the circumstances, the resultsof which form the basis of making the judgmentsabout carrying values of assets and liabilities that arenot readily apparent from other sources. Actual resultsmay dier from these estimates.

The estimates and underlying assumptions are

reviewed on an ongoing basis. Revisions toaccounting estimates are recognised in the period inwhich the estimate is revised if the revision aectsonly that period or in the period of the revision and

future periods if the revision aects both current andfuture periods.

3. Signicant accounting policies

The accounting policies set out below have beenapplied consistently to all periods presented in these

nancial statements, and have been appliedconsistently by the company.

(a) Change in accounting policies

The accounting policies adopted are consistent withthose used in the previous nancial year.

(b) Basis o consolidation

The nancial statements of the Group represent theconsolidation of the Financial Statements of theCompany and its subsidiary.

(i) Subsidiaries

Subsidiaries are those entities controlled by thecompany. Control exists when the company has the

power, directly or indirectly, to govern the nancialand operating policies of an enterprise so as to obtainthe benets from its activities which is evident whenthe company controls the composition of the boardof directors of the entity or hold more than 50% of theissued shares of the entity, or 50% of the voting rightsof the entity, or is entitled to receive more than half of every dividend from shares carrying unlimited right toparticipate in distribution of prots or capital.

Entities that are subsidiaries of another entity which isa subsidiary of the company are also treated as

subsidiaries of the company.

The nancial statements of subsidiaries are includedin the consolidated nancial statements when controleectively commences and until control eectivelyceases.

The following companies have been consolidated.- HVA Foods (Pvt) Limited - Parent- HVA Holdings (Pvt) Limited - Subsidiary

(ii) Minority interest

The proportion of the prot or loss after taxation

applicable to outside shareholders of subsidiarycompanies is reected under “Non-controllingInterests” in the consolidated nancial statement.






the asset is classied as held for sale and the date thatthe asset is derecognized.

(iv) Revaluation

Revaluation has been performed on freehold landand buildings by professionally qualied valuer usingthe market value method in the year ended

31/03/2010. The surplus is recognized on the netcarrying value of the asset and is transferred to arevaluation reserve after restating the asset at therevalued amount. The company revalues land andbuildings at least once in ve years which is stated atits fair value at the date of revaluation less anysubsequent impairment loss.

(v) Leased assets

Leases in terms of which the company assumessubstantially all the risks and rewards of ownership areclassied as nance leases. Upon initial recognition

the leased asset is measured at an amount equal tothe lower of its fair value and the present value of theminimum lease payments. Subsequent to initialrecognition, the asset is accounted for in accordancewith the accounting policy applicable to that asset.

Other leases are operating leases and, are notrecognized on the company’s balance sheet.

(g) Intangible assets

(i) Basis of recognition

An intangible asset is recognized if it is probable thatfuture economic benets that are attributable to theenterprise and the cost of the assets can be measuredreliably in accordance with SLAS 37: Intangible Assets.Accordingly, these assets are stated in the balancesheet at cost less accumulated amortization andaccumulated impairment losses (accounting policy j).

(ii) Subsequent expenditure

Subsequent expenditure is capitalized only when itincrease the future economic benets embodied inthe specic asset to which it relates. All otherexpenditure, including expenditure on internallygenerated goodwill and brands, is recognized in theprot or loss as incurred.

(h) Inventories

Inventories are stated at the lower of cost and netrealizable value. Net realizable value is the estimatedselling price in the ordinary course of business, lessthe estimated costs of completion and the estimatedcost necessary to make the sale. The cost of

inventories is based on the Weighted – Average Costprinciple and includes expenditure incurred inacquiring the inventories and bringing them to their

existing location and condition. In the case of manufactured inventories and work in progress, costincludes an appropriate share of overheads based onnormal operating capacity.

(i) Trade and other receivable

Trade receivables are stated at the amounts they areestimated to be realized net of provisions for bad anddoubtful receivables. Other receivables and duesfrom related parties are recognized at cost lessprovision for bad and doubtful receivables.

(j) Impairment

The carrying amounts of the company’s non-nancialassets, other than inventories and deferred tax asset arereviewed at each reporting date to determine whetherthere is any indication of impairment. If any suchindication exists, then the asset’s recoverable amount isestimated.

The recoverable amount of an asset or cash-generatinguntil is the greater of its value in use and its fair value lesscosts to sell. In assessing value in use, the estimatedfuture cash ows are discounted to their present valueusing a pre-tax discount rate that reects current marketassessments of the time value of money and the risksspecic to the asset. For the purpose of impairmenttesting, assets are grouped together into the smallestgroup of assets that generates cash inows fromcontinuing use that are largely independent of the cashinows of other assets or groups of assets (the “cash-generating unit”)

An impairment loss is recognized if the carrying amountof an asset or its cash-generating unit exceeds itsestimated recoverable amount. Impairment losses arerecognized in prot or loss. Impairment lossesrecognized in respect of cash-generating units areallocated rst to reduce the carrying amount of anygoodwill allocated to the units and then to reduce thecarrying amount of the other assets in the unit (group of units) on a pro rata basis.

(k) Employee benets

(i) Dened contribution plans

The Company contributes 12% and 3% of gross salaryto the Employees Provident Fund and Employees Trust Fund respectively, in terms of EPF Act No15 of 1958 as amended and to Employers Trust Fund interms of the ETF Act No.46 of 1980 as amended.

(ii) Dened benet plans

Provision has been made for retirement gratuitiesfrom the rst year of service for all employees in





conformity with the SLAS 16. However under thePayment of Gratuity Act No. 12 of 1983, the liability toan employee arises only on completion of 5 years of continued services.

The liability is not externally funded, nor actuariallyvalued. The Gratuity Liability is valued using GratuityFormula method as required by the revised Sri LankaAccounting Standard No.16 - Employee Benets.

(l) Provisions

A provision is recognized when the company has apresent obligation (legal or constructive) as a result of a past event, where it is probable that an outow of resources embodying economic benets will berequired to settle the obligation and a reliableestimate can be made of the quantum of the outow.

(m) Government grants

A government grant is recognized in the balancesheet initially as deferred income when there is areasonable assurance that it will be received and theconditions attached to it are complied with.

Grants that compensate the group for expensesincurred are recognized as revenue in the incomestatement on a systematic basis in the periods in

which the expense is incurred. Grants thatcompensate the group for the cost of an asset arerecognized in the income statement as revenue on asystematic basis over the useful life.

(n) Revenue

(i) Goods sold

Revenue from the sale of goods is recognized in theincome statement when the signicant risks andrewards of ownership have been transferred to the

buyer. No revenue is recognized if there aresignicant uncertainties regarding recovery of theconsideration due, associated costs or the possiblereturn of goods also continuing managementinvolvement with the goods.

(ii) Interest Income

Interest income recognized as it accrues in prot orloss.

(iii) Dividend income

Dividend income is recognized in the income

statement on the date that the entity`s right toreceive payments is established.

(o) Cash and cash equivalents

Cash and cash equivalents are dened as cash inhand, demand deposits and short-term highly liquidinvestments, readily convertible to know amounts of

cash and subject to insignicant risk of changes invalue. For the purpose of cash ow statement, cashand cash equivalents consist of cash in hand anddeposits in banks net of outstanding bank overdrafts.Investments with short maturities i.e. three months orless from the date of acquisition are also treated ascash equivalents.

(p) Taxation

(i) Income tax

The provision for income tax is based on the elementsof income & expenditure as reported in the nancialstatements and computed in accordance with theprovisions of the Inland Revenue Act No.10 of 2006and amendments there to. The company enjoys aconcessionary tax rate for 20 years from 1997 due to aBOI agreement.

(ii) Deferred tax

Deferred tax is recognized using the balance sheetliability method, providing for temporary dierencesbetween the carrying amounts of assets and liabilities for

nancial reporting purposes and the amounts used fortaxation purposes. Deferred tax is not recognized for thefollowing temporary dierences: the initial recognition of assets or liabilities in a transaction that is not a businesscombination and that aects neither accounting nortaxable prot, and dierences measured at the rates thatare expected to be applied to the temporary dierenceswhen they reverse, based on the laws that have beenenacted or substantively enacted by the balance sheetdate.

A deferred tax asset is recognized to the extent that it is

probable that future taxable prots will be availableagainst which the temporary dierences can be utilized.Deferred tax assets are reviewed at each balance sheetdate and are reduced to the extent that it is no longerprobable that the related tax benet will be realized.

(iii) Economic service charges

As per provisions of the Economic Service ChargesAct No. 13 of 2006, economic service charges ispayable on the liable turnover at specic rates. ESC isdeductible from the income tax liability. Anyunclaimed liability can be carried forward and set o

against the income tax payable as per the relevantprovision in the Act.




(iv) Social responsible levy (SRL)

As per the provisions of the Finance Act No 5 of 2005, asamended by the Finance Act No.11 of 2006, SRL wasintroduced with eect from 01st January 2005. SRL ispayable at the rate of 1.5% on all taxes and levieschargeable.

(q) Trade and other payables

Trade and other payables are stated cost.

(r) Expenses

(i) Expenses recognition

Expenses are recognized in the income statement onthe basis of a direct association between the costincurred and earning of specic item of income. Allexpenditure incurred in the running of the business

and in maintaining the property, plant & equipmentin state of eciency has been charged to revenue inarriving at the prot for the year.

(ii) Borrowing Cost

Borrowing costs are recognized as an expense in theperiod in which they are incurred, except to theextent where borrowing costs that are directlyattributable to the acquisition, construction, orproduction of an asset that takes a substantial periodof time to get ready for its intended use or sale, arecapitalized as part of that asset.

(iii) Finance lease payments

Minimum lease payments

Minimum lease payments are apportioned betweenthe nance charge and the reduction of theoutstanding liability. The nance charge is allocatedto each period during the lease term so as to producea constant periodic rate of interest on the remainingbalance of the liability.

(iv) Finance income & expenses

Finance income comprises interest income on fundsinvested. Interest income is recognized as it accrues inprot or loss.

Finance expenses comprise interest expenses onborrowings, bank charges and debit tax.

Foreign currency gains and losses are reported on a net basis.

(s) Earnings per share

The group presents basic earnings per share (EPS) datafor its ordinary shares. Basic EPS is calculated by dividing

the prot or loss attributable to ordinary shareholders of the company by the weighted average number of ordinary shares outstanding during the period.

(t) Segmental inormation

A segment is a distinguishable component of thecompany that is engaged either in providing products orservices (business segments), or in providing products orservices with in a particular economic environment(geographical segment), which is subject to risk and

rewards that are dierent from those of other segments.Management believes that it is not practical to providesegmental disclosures relating to segment costs andexpenses and subsequently segment prots and losses,since a realistic allocation cannot be made. The xedassets used in the company’s business are notidentiable to any particular reportable segment andcan be used interchangeably among segments.Consequently management believes that it is notpractical to provide segmental disclosures relating tototal assets since a realistic analysis among the various

operating segments is not possible.

(u) Comparative gures

Whenever necessary comparative gures are reclassiedto conform to the changes in presentation in the currentyear and disclosed as notes to the nancial statements.

(v) Cash ow statement

The cash ow of the company has been presented inusing “indirect method” in accordance with SLAS- 09:

Cash ow statement

(w) Events occurring ater the balance sheet date

All material post balance sheet events have beenconsidered and where appropriate adjustments ordisclosures have been made in respective notes to thenancial statements.

(x) Contingent liabilities

Contingencies are possible assets or obligations that

arise from a past event and would be conrmed only onthe occurrence or non-occurrence of uncertain futureevents, which are beyond the company’s control.

(y) Directors responsibility

The board of directors takes responsibility for thepreparation and presentation of these nancialstatements in accordance with the Companies Act No.07 of 2007 and the Sri Lanka Accounting Standards.





NOTES TO THE FINANCIAL STATEMENTS (Contd.) All amounts in Sri Lanka Rupees

Group Company

Year endedFor the six months period ended 30.09.2010 30.09.2010 30.09.2009 31.03.2010

(Reviewed) (Reviewed) (Unaudited) (Audited)

4 RevenueExport sales 280,849,350 280,849,350 231,858,570 461,489,725Local sales 4,371,428 4,371,428 20,274,811 26,716,594

285,220,778 285,220,778 252,133,381 488,206,319

5 Other incomeSale of bin tea & dust 112,064 112,064 348,970 802,283Brand promotion incentive - - - 297,937Packing income 21,191,148 21,191,148 18,392,586 27,428,218Gain on sale of property plant & equip. 1,731,402 1,731,402 - -Other income 136,007 136,007 157,567 304,218Flavor Sales 33,010 33,010 - -Receipts from Doubtful Debts 8,350 8,350 - -Management Fee 3,000,000 3,000,000 - -

26,211,981 26,211,981 18,899,123 28,832,656

6 Result rom operating activities The result from operating activities is after charging all expenses including following,Auditors’ remuneration 252,000 252,000 161,346 300,000Receivable/(payable) written o/(back) - - - 3,759,784Provision for slow moving inventories 504,898 504,898 - 1,474,473Legal expenses 474,177 474,177 627,376 382,558Provision for gratuity 1,010,250 1,010,250 1,014,138 1,438,631

Salaries & wages 13,786,021 13,786,021 11,112,322 11,943,503EPF 1,648,586 1,648,586 1,325,314 1,392,706ETF 412,146 412,146 319,382 348,227Bonus & incentive - - 2,439,600 620,486Raw Material purchased 197,204,636 197,204,636 172,548,138 353,094,219Direct expenses 36,187,479 36,187,479 29,140,237 44,393,265

7 Finance income and expenseFinance incomeInterest income 562,168 562,168 2,137,550 2,373,047Interest from debtors 187,858 187,858 460,683 2,931,126Foreign exchange gain 10,309,996 10,309,996 - 1,934,388

11,060,022 11,060,022 2,598,233 7,238,561

Finance costsLoan interest - packing credit (1,966,600) (1,966,600) (2,451,574) (4,344,913)Loan interest - term loan (4,241,082) (4,241,082) (4,423,258) (8,979,346)Interest - Lake Drive Holdings (Pvt) Ltd. (168,000) (168,000) (43,719) (194,255)Interest - Mrs.V.S.A.Fernando (267,159) (267,159) - -Interest on lease rentals (671,513) (671,513) (448,152) (875,736)Interest on bill discounts (3,874,537) (3,874,537) (4,708,475) (8,703,599)Over due interest (519,428) (519,428) (169,143) (1,057,032)Bank overdraft interest (838,401) (838,401) (856,517) (1,802,810)Bill discount charges (611,601) (611,601) (754,618) (1,361,892)Factoring charges (89,362) (89,362) (45,450) (260,251)Bank charges (1,062,669) (1,062,669) (1,429,705) (2,345,194)

Foreign Exchange loss - - (679) -(14,310,351) (14,310,351) (15,331,290) (29,925,028)

Net nance costs (3,250,329) (3,250,329) (12,733,057) (22,686,467)





Group Company



8 Income tax expense8.a Income tax recognized in prot or loss

Current income taxCurrent tax charges 3,004,806 3,004,806 - 2,090,391(Over) / under provision of previous period (489,292) (489,292) - (130,500)

2,515,514 2,515,514 - 1,959,891Deerred tax expenseDeferred tax charge / (reversal) (Note-25) 61,012 61,012 - (646,462)

Income tax for the period 2,576,526 2,576,526 - 1,313,429

8.b Reconciliation o accounting prot to tax expenses

Prot before tax 29,644,148 29,644,148 - 55,588,197Exempt Income & other source of income (10,793,344) (10,793,344) - (56,521,908)Aggregate disallowable expenses 15,649,410 15,649,410 - 24,590,992Aggregate allowable expenses (4,137,131) (4,137,131) - (9,517,640)Taxable income for the period 30,363,083 30,363,083 - 14,139,641

Tax losses brought forward (82,702,032) (82,702,032) - (87,650,906)Utilization of tax losses 10,627,079 10,627,079 - 4,948,874

Tax losses carried forward (72,074,953) (72,074,953) - (82,702,032)

Total statutory income 30,363,083 30,363,083 - 14,139,641Utilization of tax losses (10,627,079) (10,627,079) - (4,948,874)

Taxable income for the period-othersources of income 19,736,004 19,736,004 - 9,190,767

Concessionary rate @ 15% 2,960,400 2,960,400 - 867,952

Standard rate - - - 1,191,547SRL @ 1.5% 44,406 44,406 - 30,892

Total current tax for the period 3,004,806 3,004,806 - 2,090,391

HVA Foods (Pvt) Ltd in the terms of the principal agreement entered in to with the Board of Investment (BOI) of Sri Lanka BOI Law No.04 of 1978 is liable to income tax at 15% of its taxable prot for a period of 20 yearscommencing from 1997.

Social responsibility levy has been charged at the rate of 1.5% on the income tax liability in terms of the SocialResponsibility Levy Act No.05 of 2005.

The company has tax losses amounting to Rs.72,074,953/- (31/03/2009-Rs. 82,708,268/-) as at 30/09/2010.

Deferred tax has been computed using the current eective tax rates applicable to the company.

9 Basic earnings per share (EPS)The calculation of basic earnings per share was based on the earnings attributable to ordinary shareholders andweighted average number of ordinary shares outstanding during the year.

Restated Restated30.09.2010 30.09.2010 30.09.2009 31.03.2010(Reviewed) (Reviewed) (Unaudited) (Audited)

Prot for the period 27,067,622 27,067,622 16,567,535 54,274,768Weighted average number of ordinary shares 46,500,062 46,500,062 46,500,062 46,500,062

Basic earning per share 0.58 0.58 0.36 1.17

Annualized basic earning per share 1.16 1.16 0.71 1.17

EPS for 2009/10 has been restated to give eect to the share split during the year (Note-19). The number of sharesas previously reported was 1,500,002 and subsequent to the share split 46,500,062 shares was used to computethe EPS for 2009/10.





NOTES TO THE FINANCIAL STATEMENTS (Contd.) All amounts in Sri Lanka Rupees10 Property, plant & equipment10.1 Property, plant & equipment - Consolidated

As at Additions / Disposals / As atCost / Valuation 01-04-2010 Transer Transer 30-09-2010

Free hold assetsLand 114,100,000 6,000,000 - 120,100,000Buildings 63,040,250 104,210 - 63,144,460Motor vehicle 182,908 1,069,565 - 1,252,473Machinery 29,834,553 1,054,333 - 30,888,886Stores equipment 2,652,045 - - 2,652,045Oce equipment 2,855,884 212,900 - 3,068,784Furniture and ttings 609,137 26,075 - 635,212Name board 119,234 - - 119,234Software equipments 644,855 - - 644,855

214,038,866 8,467,082 - 222,505,948

Lease hold assetsMotor vehicle 6,319,114 - (6,319,114) -Machinery 11,435,748 5,000,000 (8,135,748) 8,300,000

17,754,862 5,000,000 (14,454,862) 8,300,000

Total cost / valuation 231,793,728 13,467,082 (14,454,862) 230,805,948

As at Depreciation Disposals / As atAccumulated depreciation 01-04-2010 or the year Transer 30-09-2010

Free hold depreciationBuildings - 1,577,595 - 1,577,595

Motor vehicles 144,498 8,227 1,069,566 1,222,291Machinery 24,622,033 1,204,151 - 25,826,184Stores equipment 2,332,012 120,770 - 2,452,782Oce equipments 2,208,608 165,918 - 2,374,526Furniture and ttings 209,384 30,984 - 240,368Name board 170 5,962 - 6,132Software equipments 613,866 15,495 - 629,361

30,130,572 3,129,102 1,069,566 34,329,239

Lease hold depreciationMotor vehicles 4,805,375 546,529 (5,351,904) -Machinery 10,757,769 677,978 (8,135,748) 3,299,999

15,563,144 1,224,507 (13,487,652) 3,299,999

Total accumulated depreciation 45,693,716 4,353,609 (12,418,086) 37,629,238Capital-work-in-progress 50,185,559 2,455,565 - 52,641,124

Carrying amount 236,285,570 245,817,834




All amounts in Sri Lanka Rupees10 Property, plant & equipment (Contd.)10.2 Property, plant & equipment - Company

As at Additions / Disposals / As atCost / Valuation 01-04-2010 Transer Transer 30-09-2010

Free hold assets

Land 114,100,000 6,000,000 - 120,100,000Buildings 63,040,250 104,210 - 63,144,460Motor vehicle 182,908 1,069,565 - 1,252,473Machinery 29,834,553 1,054,333 - 30,888,886Stores equipment 2,652,045 - - 2,652,045Oce equipment 2,855,884 212,900 - 3,068,784Furniture and ttings 609,137 26,075 - 635,212Name board 119,234 - - 119,234Software equipments 644,855 - - 644,855

214,038,866 8,467,082 - 222,505,948

Lease hold assetsMotor vehicle 6,319,114 - (6,319,114) -Machinery 11,435,748 5,000,000 (8,135,748) 8,300,000

17,754,862 5,000,000 (14,454,862) 8,300,000

Total cost / valuation 231,793,728 13,467,082 (14,454,862) 230,805,948

As at Depreciation Disposals / As atAccumulated depreciation 01-04-2010 or the year Transer 30-09-2010

Free hold depreciationBuildings - 1,577,595 - 1,577,595Motor vehicles 144,498 8,227 1,069,566 1,222,291Machinery 24,622,033 1,204,151 - 25,826,184Stores equipment 2,332,012 120,770 - 2,452,782

Oce equipments 2,208,608 165,918 - 2,374,526Furniture and ttings 209,384 30,984 - 240,368Name board 170 5,962 - 6,132Software equipments 613,866 15,495 - 629,361

30,130,572 3,129,102 1,069,566 34,329,239

Lease hold depreciationMotor vehicles 4,805,375 546,529 (5,351,904) -Machinery 10,757,769 677,978 (8,135,748) 3,299,999

15,563,144 1,224,507 (13,487,652) 3,299,999

Total accumulated depreciation 45,693,716 4,353,609 (12,418,086) 37,629,238

Capital-work-in-progress 50,185,559 2,455,565 - 52,641,124

Carrying amount 236,285,570 245,817,834

10.3 Assets pledged as security against borrowings are disclosed in note no.33.10.4 The details of freehold land and buildings which are stated at revalued amounts are as follows.

Company property Method o Date o Extent Valuation Valuervaluation valuation o Land Rs.

1. Land situated at Linton Road,Kandana Market value 31-03.2010 200 Perchaes Rs.114,100,000/- Mr.P.B.Kalugalagedara

2 Building situated at Linton Road,Kandana Market value 31-03.2010 - Rs.63,040,250/- Mr.P.B.Kalugalagedara

10.5 Land purchsed during the period

Land situated at Extent o Cost o Valuation as atland purchased Rs. 31/03/2010Rs.

Linton Road, Kandana 20 Perchaes Rs.6,000,000 Rs.6,000,000






11 Investment

Group Company

30.09.2010 30.09.2010 30.09.2009 31.03.2010(Reviewed) (Reviewed) (Unaudited) (Audited)

Nature o %business holding

Non-quoted InvestmentOrdinary shares of HVA InvestingHoldings (Pvt) Ltd. company 99.99% - 45,000,000 - -

(The company - 45,000,000 - -

has not stillcommenced itsoperations.)

12 Intangible AssetsBrandBalance as at 1st April - - - -Additions 44,938,998 - - -Impairment during the year - - - -

Balance as at the end of the period 44,938,998 - - -

Intangible assets represents the excess of the cost of the business combination over the fair value of identiablenet assets, liabilities and contingent liabilities of the subsidiary i,e HVA Holdings Pvt Limited as at the date of acquisition.

The company acquired HVA Holding (Pvt) Ltd on 29th September 2010 in order to use the international brand,”HELADIV” owned by HVA Holding (Pvt) Ltd, as per the Valuation report given by Price Waterhouse Coopers on 1st

October 2010.The “HELADIV” brand has been valued by royalty methord, based on the ve-year forecast sales projects providedby the management and the bellow-mentioned royalty rates, and have assessed the indicative value of the brandas at 31st December 2009 to be in the order of USD 1.08mn to USD 1.24mn (with a mid-point value of USD1.16mn)

Adopted the following royalty rates for the respective market segments served by the Company.- Russia & the CIS states - 6% royalty rate on net sales generated from the region.- Far East Asia - 6% royalty rate on net sales generated from the region.- Europe, Americas, & Africa - 4% royalty rate on net sales generated from the region.- New Markets & products - 3% royalty rate on net sales generated from the region.

The exchange rate applied to the cash ow projection = 11.2%

13 Inventories Raw material - Tea 11,373,182 11,373,182 8,241,913 16,872,187

Raw material-ice tea concentrate & fruit base 1,063,170 1,063,170 1,734,372 1,450,544Flavours 5,210,167 5,210,167 3,379,169 3,203,106Packing materials 25,523,321 25,523,321 22,388,663 22,986,545Work in progress 23,664 23,664 31,644 3,045,880Finished goods 1,310,241 1,310,241 2,330,604 1,358,108Others 920,147 920,147 - 506,233

45,423,893 45,423,893 38,106,365 49,422,603Provision for slow moving inventories (2,687,179) (2,687,179) (1,500,000) (2,182,281)

42,736,713 42,736,713 36,606,365 47,240,322





Group Company

30.09.2010 30.09.2010 30.09.2009 31.03.2010(Reviewed) (Reviewed) (Unaudited) (Audited)

14 Trade receivables Trade debtors 109,485,635 109,485,635 123,937,540 109,005,164

Provision for doubtful debts (Note-14.a) (303,512) (303,512) (725,333) (804,724)109,182,123 109,182,123 123,212,207 108,200,440

14.a Provision or doubtul debts

Balance as at 1st April 804,724 804,724 725,333 725,333Reversals of provisions during the period (501,212) (501,212) - -Provisions made during the period - - - 79,391

Balance as at the end of the period 303,512 303,512 725,333 804,724

15 Amount due rom / due to related party15.a Amount due rom related parties

Relationship

HVA Farms (Pvt) Ltd Common Directors 518,081 518,081 582,331 -HVA Beverages (Pvt) Ltd Common Directors - - 151,576 -HVA Lanka Exports (Pvt) Ltd Parent Company 107,459,695 107,459,695 14,754,383 77,516,294

107,977,776 107,977,776 15,488,290 77,516,294

15.b Amount due to related parties

RelationshipLake Drive Holdings (Pvt) Ltd Common Directors 55,681,030 55,681,030 611,971 9,609,746Mr. A.R.H. Fernando Director 2,000,000 2,000,000 - -Mrs. V.S.A. Fernando Director 6,848,132 6,848,132 - 6,580,973

64,529,162 64,529,162 611,971 16,190,719

16 Prepayments & other receivablesVAT receivables 7,685,494 7,685,494 10,645,160 8,940,944W.H.T. - - 203,405 -NBT receivables 693,556 693,556 144,074 489,213Economic Service Charge - - 4,506,696 -Insurance pre-payments 443,760 443,760 627,099 228,598Lease pre-payments - - 351,005 351,005Others deposits & pre-payments 824,822 824,822 1,099,375 991,414

9,647,632 9,647,632 17,576,814 11,001,174

17 Deposits & advancesAdvance 2,676,746 2,676,746 2,690,091 1,590,336

Refundable deposits 83,741 83,741 83,741 83,741Deposits 900,000 900,000 500,000 500,000

3,660,487 3,660,487 3,273,832 2,174,077

18 Cash and cash equivalentsShort term deposits 35,637,092 35,637,092 29,136,130 29,741,969Cash at bank 2,374,839 2,303,834 8,553,442 1,794,273

38,011,931 37,940,926 37,689,573 31,536,243

19 Stated capital

46,500,062 ordinary shares(31.03.2010 - 1,500,002 ordinary shares) 15,000,020 15,000,020 15,000,020 15,000,020

15,000,020 15,000,020 15,000,020 15,000,020






The company has sub divided one ordinary shares into 31 ordinary shares thereby increasing the number of theordinary shares to 46,500,062 shares. The special resolution passed on 29th September 2010 for this purpose.

The holders of ordinary shares are entitled to receive dividend from time to time and entitled to one vote perindividual present at the meeting of shareholders or one vote per share in case of a poll.

Group Company



20 Revaluation reserveBalance as at 1st April 134,000,948 134,000,948 96,136,854 96,136,854During the period revaluation surplus - - - 37,864,094

Balance as at the end of the period 134,000,948 134,000,948 96,136,854 134,000,948

The revaluation was performed on freehold land and buildings as at 31st March 2010 by Mr.P.B. KalugalagedaraChartered Valuation Surveyor using the market value method.

21 Retained earningsBalance as at 1st April (49,089,851) (49,089,851) (103,364,619) (103,364,619)Net prot for the period 26,884,716 26,884,716 16,567,535 54,274,768

Balance as at the end of the period (22,205,135) (22,205,135) (86,797,084) (49,089,851)

Revenue reserve consists only of retained earnings.

22 Employee benet

Balance as at 1st April 7,164,612 7,164,612 5,910,529 5,910,529Provision for the period 1,010,250 1,010,250 1,014,138 1,438,631Payments during the period (167,741) (167,741) (60,700) (184,548)

Balance as at the end of the period 8,007,121 8,007,121 6,863,967 7,164,612

The employee benet plan entitles a retired employee to receive payment equal to 1/2 of nal salary multipliedby the number of completed years of service. However under the Payment of Gratuity Act No. 12 of 1983, theliability of the employee arises only on the completion of ve year of continued service.

The employee benet plan valuation is carried out based on gratuity formula method in accordance with SLAS 16.

Principal assumptions as at balance sheet date(Expressed as weighted average) as ollows:

Discount rate as at 30th September 2010 8% 8% - 8%Future salary increase 11% 11% - 11%

23 Interest bearing loans and borrowings23.a Amount payable more than one year

Future minimum lease payments 7,081,392 7,081,392 6,577,909 4,210,871Interest (2,081,392) (2,081,392) (1,041,962) (660,915)

Present value of minimum lease payments 5,000,000 5,000,000 5,535,947 3,549,956Term loans 124,138,000 124,138,000 132,719,737 132,033,500Less:Payable within one year (25,700,037) (25,700,037) (17,517,514) (27,266,574)

103,437,963 103,437,963 120,738,170 108,316,882





Group Company



23.b Amount payable with in one year

Bill discounting 87,823,523 87,823,523 108,229,642 86,704,972Packing credit Loans 62,212,148 62,212,148 33,773,853 61,449,574Payable within one year 25,700,037 25,700,037 17,517,514 27,266,574

175,735,708 175,735,708 159,521,009 175,421,120

24 Government grants

Balance brought forward 29,402,272 29,402,272 - -Receipts during the period - - 2,120,187 29,402,272

Balance carried forward 29,402,272 29,402,272 2,120,187 29,402,272

The Asian Development Bank oered a grant of Rs. 40,793,651/- on 30/09/2009 to construct an ice tea plant.

25 Deerred tax assetsDeerred tax assets Tax eect of retiring gratuity (151,538) (151,538) - (215,795)Deferred tax liability

Tax eect of property, plant & equipment 1,274,512 1,274,512 - 1,277,757

Net deferred tax liability 1,122,974 1,122,974 - 1,061,962

The gross movement on the deerred income taxBalance as at 1st April 1,061,962 1,061,962 - 1,708,424Provision/(reversal) made during the period 61,012 61,012 - (646,462)

Balance as at the end of the period 1,122,974 1,122,974 - 1,061,962

Deferred tax asset of Rs. 10,811,243/- (31/03/2009-Rs. 12,406,206/-) on carried forward losses of Rs. 72,074,953/-(31/03/2009-Rs. 82,708,043/-) has not been recognized due to uncertainty.

26 Trade payable Tea creditors 360,456 360,456 442,767 249,170Packing material creditors 23,339,712 23,339,712 24,750,862 30,791,512Flavor creditors 2,988,442 2,988,442 1,461,105 1,896,806Other creditors 262,540 262,540 269,344 267,584

26,951,150 26,951,150 26,924,078 33,205,072

27 Deposits & advances payable

Debtors advance 4,708,939 4,708,939 1,517,284 4,517,989Deposits from debtors 16,784,441 16,784,441 17,219,426 17,106,930Other deposits & advances 59,461 59,461 59,461 59,461

21,552,841 21,552,841 18,796,171 21,684,380

28 Accrued expenses & other creditorsSalary and related expenses payables 1,634,008 1,634,008 3,007,983 1,772,481ESC payable 3,098,051 3,098,051 - 2,522,903Custom duty payables 93,668 93,668 135,655 56,273Freight creditors 2,613,017 2,613,017 1,777,675 1,785,212Interest payables 709,238 709,238 1,492,400 203,836Other payables 16,243,564 16,233,564 10,519,979 10,307,534

24,391,546 24,381,546 16,933,692 16,648,239






Group Company



29 Related parties disclosures29.1 Transactions with key management personnel.

Key management personnel include all the members of the Board of directors of the company having authorityand responsibilities for planning , directing and controlling the activities of the company.

29.2 Key management personnel compensationKey management personnel compensation comprised,Short- term employee benets including salaries

3,995,280 3,995,280 3,653,400 7,306,800

29.3 Key management personnel and director transactions

Directors of the company control 100% of the voting shares of the company. Following directors are also directorsof HVA Lanka Exports (Pvt) Ltd,

Name o the director,Mr.A.R.H.FernandoMrs.V.A Fernando

The aggregated value of transactions and outstanding balances relating to key management personnel were as follows;

DirectorMr. A.R.H.FernandoLoan obtained from the Director (Interest free loan)

- Transaction value 2,500,000 2,500,000 - -- Outstanding value 2,000,000 2,000,000 - -

Mrs. V.S.A.FernandoLoan obtained from the Director (Interest rate is 8% p.a)

- Transaction value - Loan - - - 5,000,000- Interest 267,159 267,159 - 1,580,793

- Outstanding value - Loan 5,000,000 5,000,000 - 5,000,000- Interest 1,848,132 1,848,132 - 1,580,973

29.4 Transactions with group companies and director transactionsCompany RelationshipHVA Lanka Exports (Pvt) Ltd. Common Directors

Nature o transactionContract packing incomeFrom subsidiary to parent 250,264 250,264 - -

Management ees receivedFrom subsidiary to parent 3,000,000 3,000,000 - -

Sale o goodsFrom subsidiary to parent 1,609,671 1,609,671 14,077,747 18,088,049From parent to subsidiary 3,831,535 3,831,535 7,131,056 16,006,323

Expenses & other transactionsFrom subsidiary to parent 115,120,043 115,120,043 72,525,534 239,144,875From parent to subsidiary 72,690,531 72,690,531 9,783,527 165,975,009




HVA Farms (Pvt) Ltd Common DirectorsNature o transactionReimbursement of expenses 518,081 518,081 - 262,570

Receivable written o - - - 846,201

Lake Drive Holdings(Pvt) Ltd Common Directors

Nature o transaction Transport charges 106,174 106,174 - 1,208,318

Interest expenses 402,788 402,788 - 194,255Purchase consideration on

acquisition of HVA Holding (Pvt) Ltd - 45,000,000 - -Purchased of a land 6,000,000 6,000,000 - -

HVA Beverage (Pvt) Ltd Common Directors

Nature o transactionReceivable written o - - - 156,576

For the year end outstanding balances refer note 15 to the Financial Statements.

30 Financial arrangements or continuous operationsSeylan Bank has made the following arrangements in HVA Foods (Pvt) Ltd with eect from 01st June 2008 whichwill enable the company to continue in business.

a. Converted all Seylan Bank Rupee and Foreign Currency Term Loans to one restructured Foreign CurrencyLoan at a lower interest rate of 04% per annum with a one year grace period on capital re-payment.

b. Transferred Hard Core of Packing Credit Loans and Bills Discounted balances to the same restructuredForeign Currency Term Loan.

c. This Restructured Foreign Currency Term Loan is amounting Rs 126 Man.(USD 1,170,000 /-) at 07%per annum repayable in four years with one year grace period.

31 Events ater the balance sheet date

No events identied since the balance sheet date, which may require a disclosure or an adjustment in thenancial statements except for the following.- The company has become a public limited company since 03rd November 2010.

32 Commitment & contingencies The company has contingent liabilities on behalf of the following companies.Company name Bank Guarantee Amount (Rs.)HVA Lanka Exports (Pvt) Ltd Lankaputhra Primary, 130 Mn

Development Bank mortgage-LandHVA Lanka Exports (Pvt) Ltd HSBC Corporate guarantee 26.9 MnHVA Lanka Exports (Pvt) Ltd HSBC Issuance of guarantee 0.5 Mn

33 Assets pledged as securities The following assets of the company have been pledged as securities for liabilities as at the balance sheet date.

Bank Nature o Nature o Amount o Rs.the assets the liability Securities

Seylan Bank Land and Factory Building Term Loan, Packing 34 MnCredit Loans, Export Bill,O/D

Seylan Bank Stocks and packing materials Term Loan, Packing 64.6 MnCredit Loans, Export Bill,O/D

HSBC Stocks and packing materials Term Loan, Export Bill 26.9 Mn

34 Comparative inormationNo comparative information has been reclassied during the year.

35 Directors responsibilityThe board of directors takes the responsibility for the preparation and presentation of these nancial statementsin accordance with Companies Act No. 07 of 2007 and Sri Lanka Accounting Standards.

36 No o employeesThe total number of employees of the company as at 30th September 2010 - 89 (as at 31st March 2010 - 87).






ANNEXURE B – INDEX ON CHARTS AND FIGURES ILLUSTRATED IN THE PROSPECTUS

List of ChartsChart 4-1: Break up of Total Revenue based on Product Category ..........................................................................................................................................30

Chart 4-2: Break up of Total Revenue based on Geographical Market ....................................................................................................................................31

Chart 4-3: Export Market Concentration based on Export Quantity ........................................................................................................................................32

Chart 4-4: Historical Volume Movement - CIS and Russia ...............................................................................................................................................................33

Chart 4-5: Historical Volume Movement - Far Eastern Region .....................................................................................................................................................34

Chart 4-6: Historical Volume Movement - Europe & Americas ....................................................................................................................................................37

Chart 4:7- Break up of Sales based on Product Line ...........................................................................................................................................................................39

Chart 5-1: Major Sources of Foreign Exchange Earnings .................................................................................................................................................................43

Chart 5-2: Tea Production in Sri Lanka for the Past Decade ...........................................................................................................................................................44

Chart 5-3: Auction Price per kg ........................................................................................................................................................................................................................46

Chart 5-4: January-July 2009 Vs 2010 Tea Packet Imports ...............................................................................................................................................................48

Chart 6-1: Per Capita GDP at market prices (USD) ...............................................................................................................................................................................50

Chart 6-2: GDP (percent change) ...................................................................................................................................................................................................................50

Chart 6-3: Share of Trade.....................................................................................................................................................................................................................................50Chart 11-1: Revenue Movement .....................................................................................................................................................................................................................68

Chart 11-2: Gross Prot Movement ...............................................................................................................................................................................................................69

Chart 11-3: Operating Prot Movement ....................................................................................................................................................................................................69

Chart 11-4: Net Prot Movement ...................................................................................................................................................................................................................69

Chart 11-5: Monthly Revenue..........................................................................................................................................................................................................................70

Chart 11-6: Prot Before Taxation ...................................................................................................................................................................................................................70

List of FiguresFigure 4-1: Group Structure ................................................................................................................................................................................................................................23

Figure 4-2: Market Concentration ..................................................................................................................................................................................................................31

Figure 5-1: Production Process – Black Tea ...............................................................................................................................................................................................45

Figure 5-2: Production Process – Value Added Tea ..............................................................................................................................................................................47








Bankers to the Oering

DFCC Vardhana Bank Branches

Ambalangoda 26B, Galle Road, Ambalangoda 091 2255965

Ampara Branch 3, D S Senanayake Road, Ampara 063 2223442

Anuradhapura 249, Maithreepala Senanayake Mw, A’pura 025 2223417/8Avissawella 27/29 Yatiyanthota Rd, Avissawella 036 2233900-1

Badulla 14, Udayaraja Mw, Badulla 055 2230160/2

Bandarawela 126, Main Street, Bandarawela 057 2224849

Batticaloa 105, Trinco Road, Batticaloa 065 2228222

Borella 14, Cotta Road, Colombo 08 011 2690069

Chillaw 44, Kurunegala Rd, Chillaw 032 2220236/7

City Oce 73/5, Galle Road, Colombo 3 011 2442244

Colombo Oce 73, W A D Ramanayake Mawath, Colombo 2 011 2371371

Dambulla 632, Anuradapura Rd, Dambulla 066 2283553/4

Deniyaya 04, Pallegama Rd, Deniyaya 041 2273073/4

Galle 93, Wakwella Rd, Galle 091 222737/76

Gampaha 123, Baudhaloka Mw, Gampaha 033 2226104

Gampola 73, Nuwaraeliya Rd, Gampola 081 2350876

Gangodawila 601/1, High Level Rd, Gangodawila 011 2442711

Horana 49 Panadura Rd, Horana 034 2265331/2

Jana Branch 141, K K S Road, Jana 021 2221444

Kadawatha 341, Kandy Road, Kadawatha 011 2922340/1

Kaduruwela 626, Main Street, Kaduruwela 027 2225859

Kalawana 70, Mathugama Road, Kalawana 045 2255411/2

Kaluthara 270, Main Street, Kaluthara 034 2225560

Kandy 5, Dewa Veediya, Kandy 081 2234411Katugasthota 202/3, Kandy road, Katugasthota 081-2213465/6

Kiribathgoda 60, Kandy Road, Kiribathgoda 011 2910965

Kotahena 214, Bandaranayake Mw. Colombo 13 011 2438500/1

Kottawa 29, High Level Road, Kotta 011 2783886/7

Kuliyapitiya 139, Madampe Rd, Kuliyapitiya 037 2284564/5

Kurunegala 25, Rajapihilla Rd, Kurunegala 037 2224142

Maharagama 135, High Level Road, Maharagama 011 2838668

Malabe 9, Athurugiriya Rd, Malabe 011 2442713/4

Matale 129, Main Street, Matale 066 2234332/4

Matara 5, Hakmana Road, Matara 041 2225500/2Moratuwa 129 A, Galle Road, Moratuwa 011 2642336

Nawala 540, Nawala Road, Rajagiriya 011 2880880

Negambo 389/A, Main Street, Negombo 031 2227555/6

Nugegoda 24, Nawala Road, Nugegoda 011 2814038/9

Nuwara Eliya 58A,60 Park Road, Nuwara-eliya 052 2223568/9

Panadura 114/A, Janapriya Mw, Panadura 038 2241630/1

Peradeniya 901/A, Peradeniya Rd, Kandy 081 2387673

Pillyandala 1, Old Road, Piliyandala 011 2609700/2

Rathnapura 46, Bandaranayake Mw, Rathnapura 045 2223667/8

Trincomalee 246, Ehamparam Road, Trincomalee 026 2225550Wattala 424, Negombo Road, Wattala 011 2949148/9

Wellawatta 02, 33rd Lane, Wellawatta 011 2362741




ANNEXURE D – ‘HELADIV’ BRAND EQUITY

The ‘HELADIV’ trademark is owned and registered under HVA Foods (Private) Limited and for commercial purposes is

employed by the HVA Group. This trademark has enabled consumers with a means of identifying and distinguishing the

‘HELADIV’ brand of products produced by HVA Group against the goods supplied by any other entity.

Based on the assessment carried out by PwC Sri Lanka, the value of the ‘HELADIV’ brand as at 31st December 2009 has

been estimated at USD 1.08 million to USD 1.24 million (with a mid-point value of USD 1.16 million). At a US dollar to Sri

Lankan rupee exchange rate of USD 1 : LKR 114 this implies a value range in the order of LKR 124.0 million to LKR 141.6

million (with a mid-point of SLR 132.8 million). This brand value has been assessed employing the relief from royalty

approach, a generally accepted valuation approach where value attributed to an intangible asset is estimated based on

the notional royalty expense savings from ownership of the brand vis-à-vis royalties or franchise fees payable on an

arm’s length basis to a third party in return for the right of use of such brand.

‘HELADIV’ brand value has been estimated based on the ve-year forecast sales amounts provided by management,

estimated royalty rate applicable to the associated brand sales generated and computation of notional post-tax royalty

streams, net of any associated marketing expenses generated thereafter. These post-tax royalty streams have been

discounted at the company’s post-tax weighted average cost of capital in order to arrive at the assessed brand value.Further, dierent market segments catered to by the ‘HELADIV’ brand have been reviewed in order to assess the brand

proposition within the respective market segments. Both publicly available and PwC Sri Lanka proprietary information

on royalty rates and franchise agreements have been reviewed to carry out an overall assessment of the economic

benets generated by HVA Foods (Private) Limited.




ANNEXURE E – CUSTODIAN BANKS

Bank o Ceylon Banque Indosuez

Head Oce, C/O Hatton National Bank Limited,11th Floor, Cinnamon Garden Branch,04, Bank of Ceylon Mawatha, 251, Dharmapala Mawatha,Colombo 01 Colombo 07

T: 2448348, 2338742/55, 2544333 T: 2686537, 2689176

Citi Bank Commercial Bank o Ceylon Limited

65 C, Dharmapala Mawatha, Commercial House,P.O. Box 888, 21, Bristol Street,Colombo 07 P.O. Box 853,

T: 2447316/8, 2447318, 2449061, 2328526, 4794700 Colombo 01T: 2445010-15, 238193-5, 430420, 336700

Deutsche Bank Hatton National Bank Limited

P.O. Box 314, HNB Towers,

No. 86, Galle Road, 479, T.B. Jayah Mawatha,Colombo 03 T: 2664664 T: 2447062, 2438057

The Hong Kong and Shanghai Banking Corporation Limited

24, Sir Baron Jayathilake Mawatha,Colombo 01

T: 2325435, 2446591, 2446303, 2346422

People’s Bank Standard Chartered Bank

Head Oce, 5th Floor, 37, York Street,Sir Chittampalam A Gardiner Mawatha, P. O. Box 112,Colombo 02 Colombo 01

T: 2781481, 237841-9, 2446316-15, 2430561 T: 4794400, 2480000

Sampath Bank Limited State Bank o India

110, Sir James Peiris Mawatha, 16, Sir Baron Jayathilake Mawatha,Colombo 02 Colombo 01

T: 5331441 T: 2326133-5, 2439405-6, 2447166, 2472097

Seylan Bank Limited Union Bank o Colombo Limited Level 8, Ceylinco Seylan Towers, 15A, Alfred Place,90, Galle Road, Colombo 03

Colombo 03 T: 2370870 T: 2456789, 4-701812, 4-701819, 4-701829

Nations Trust Bank Limited National Savings Bank

256, Sri Ramanathan Mawatha, 255, Galle Road,Colombo 15 Colombo 03

T: 4313131 T: 2573008-15

Pan Asia Banking Corporation PLC Public Bank Berhad

Head Ocer, No: 340, R A De Mel Mawatha,450, Galle Road, Colombo 03Colombo 03 T: 2576289, 7290200-07

T: 2565565










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