Kotmale Holdings PLC Annual Report...

Kotmale Holdings PLCA Member of C T Holdings Group

Annual Report 2010/2011

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Kotmale Holdings PLCNo. 40, York Street,

Colombo 01.

Name of the CompanyKotmale Holdings PLC

Company Registration No. PQ 213

Legal Form Incorporated as a public Company in 1967 under the provisions of the companies ordinance No. 51of 1938 and subsequently re-registered under the Companies Act No. 7 of 2007 on 6th May 2008

Stock Exchange Listing In 1969 the Company was Listed on the Colombo Stock Exchange

Board of Directors Stuart Young (Chairman) - Appointed w.e.f. 05 January 2011

V R Page (Deputy Chairman) - Appointed w.e.f. 05 January 2011

M I Abdul Wahid (Managing Director) - Appointed w.e.f. 05 January 2011

M S J Fernando (Chief Executive Officer)P S Mathavan - Appointed w.e.f. 05 January 2011

A T P Edirisinghe - Appointed w.e.f. 05 January 2011

Sunil Mendis - Appointed w.e.f. 05 January 2011

J C Page - Appointed w.e.f. 01 May 2011

Mrs. Manjula Mathews - Resigned w.e.f. 05 January 2011

D Schaffter - Resigned w.e.f. 05 January 2011

N E Rodrigo - Resigned w.e.f. 05 January 2011

R Schaffter - Appointed w.e.f. 05 August 2010 / Resigned w.e.f. 05 January 2011

A D E I Perera - Appointed w.e.f. 05 August 2010 / Resigned w.e.f. 05 January 2011

Subsidiaries Kotmale Dairy Products (Pvt) LtdKotmale Milk Foods Ltd.Kotmale Milk Products Ltd.Kotmale Products Ltd.Kotmale Marketing (Pvt) Ltd.Kotmale Kiri (Pvt) Ltd.

Registered Office No 40, York Street, Colombo 1.Tel: 2427500

Factory No.20, Sri Sumana Mawatha, New Town, Mulleriyawa.Tel: 2578774 – 6

Company Secretary S L W Dissanayake

RegistrarsSSP Corporate Services (Pvt) LtdNo 101, Inner Flower Road, Colombo 03.Tel: 2573894

Corporate Information

Auditors M/s Nihal Hettiarahchi & CoChartered Accountants622B, Kotte Road, Kotte.

Bankers Bank of CeylonDFCC Vardhana BankHatton National Bank PLCThe Hongkong & Shanghai Banking CorporationPan Asia Banking CorporationSeylan Bank PLCCommercial Bank PLC.

Remuneration CommitteeMr. Sunil Mendis (Chairman)Mr. A T P Edirisinghe

Audit CommitteeMr. A T P Edirisinghe (Chairman)Mr. Sunil Mendis

Produced by Copyline (Pvt) Ltd Printed by Printel (Pvt) Ltd

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%Here at Kotmale we do not believe in doing anything halfway. That is why we have remained a trusted name in the industry, with a strength that has never diminished and a focus that has made us ready to go. We are 100% in everything we do, and as an entity that has nourished a nation, we believe in the best. That is why we are the one hundred percent Sri Lankan Milk Company.

Sri LankanMilk Company

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Kotmale Holdings PLC | Annual Report 2010/2011

Contents

Our Vision and Mission .......................................... 3Financial Highlights ............................................... 5Chairman’s Review ................................................ 6CEO’s Review ....................................................... 8Profile of Directors ............................................... 13Corporate Governance ........................................ 15Risk Management ................................................ 23Sustainability Report ............................................ 26

Financial Reports

Annual Report of the Directors on the Affairs of the Company .................................... 29Statement of Directors’ Responsibilities .............. 32Independent Auditors’ Report .............................. 33Income Statement ............................................... 34Balance Sheet ..................................................... 35Statement of Changes in Equity .......................... 36Cash Flow Statement .......................................... 37Notes to the Financial Statements ....................... 38Five Year Financial Summary ............................. 55Investor Relations Supplement ............................ 56Notice of Annual General Meeting ....................... 58Proxy Form .......................................................... 59

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To be the leading producer of food and beverage products for the local and international market.

Providing the nation with quality and affordable food and beverage products using state of the art technology and local expertise, continuously seeking opportunities for growth and creating an environment that develops, motivates and rewards all

employees whilst providing consistent returns to all our stakeholders.

Our Vision

Our Mission

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Rs. 1,543 Mn 14.5% Growth

Group Turnover

(2010 - Rs. 1,348 Mn)

Rs. 75 Mn 14.9% Growth

Group Profit After Tax

(2010 - Rs. 65 Mn)

“We pride ourselves in bringing to bear a total commitment of all our human, technological, material and innovative resources on everything we do, in our drive towards higher levels of perfection in the interests of total customer satisfaction and our contribution to national development. The country and our people, we firmly believe, deserve the very best, and that is our goal: to deliver the very best. We look to a more dynamic future for all, the will

and ability to succeed our best guarantees of that success.”

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Financial Highlights

Group 2010/11 2009/10 Rs. 000’s Rs. 000’s Operating Results Turnover 1,543,379 1,348,176 Gross Profit 328,585 288,905 Net Finance Cost (8,114) (10,172) Profit After Taxation 75,283 65,506 Balance Sheet HighlightsNon - Current Assets 341,822 345,242 Current Assets 395,696 394,344Current Liabilities 163,249 153,239Non - Current Liabilities 27,627 52,187Share Capital & Reserves 546,642 534,159Total Assets 737,518 739,586

Shareholders Information Market Price Per Share (at the year end) (Rs.) 53.50 24.75 Earnings per Share (Rs.) 2.40 2.09Net Assets per Share (Rs.) 17.41 17.01Interest Cover (times) 10.50 9.56Debt/ Equity Ratio (times) 0.05 0.10Borrowings / Total Assets (times) 0.01 0.04Price Earnings Ratio (times) 22.29 11.84

06 07/08* 08/09 09/10 10/11

1,400

Rs. Mn.

Group Turnover

0

1,600

1,200

1,500

1,300

1,450

1,250

1,550

1,350

06 07/08* 08/09 09/10 10/11

500

Rs. Mn.

Group Total Assets

0

900

100

700

300

600

200

800

400

06 07/08* 08/09 09/10 10/11

250

Rs. Mn.

Group Gross Profit

0

350

50

150

300

100

200

06 07/08* 08/09 09/10 10/11

60

Rs. Mn.

Group Profit After Taxation

0

80

20

40

70

30

50

10

*Note - The figures stated for financial year 2007/08 reflect performance for a 15 month period, consequent to the Company changing its financial year from 31st December to 31st March.

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Chairman’s Review

Dear Shareholders,

On behalf of the Board of Directors, I have the pleasure of presenting the Annual Report and the Audited Statements of Accounts of your Company for the financial year ending 31st March 2011.

The period under review was a remarkable time both for your Company and indeed the Nation. Having emerged from the protracted civil war which only ended in May 2009, the nascent ‘peace dividend’ strengthened yet further in 2010, as the country became used to the refreshing feel of normalcy. There was and still is a palpable spirit of optimism amongst the public at large. This was spurred on by strong economic growth which closed the year at 8 per cent, a momentum expected to continue in the medium to long term.

Sri Lanka was fortunate to have in place policies and a regulatory environment, which resulted in the country being left largely unscathed by the global financial crisis of 2008. This was a crisis that left many of the ‘advanced economies’ reeling with effects that are still being felt today, although it must be noted that emerging economies like India, China and others specifically in the Asian region, bounced back commendably faster, firmly introducing the trend of a new world order.

With GDP showcasing strength and stability, Sri Lanka has now positioned herself at Middle Income Country status, while external entities like the IMF continued to augment the permeating confidence by presenting the tranches of the US $ 2.6 Bn, Standby Arrangement and sovereign ratings were upped by Moody’s, Standard & Poor and Fitch Ratings.

Sri Lanka also saw a continued integration of the North and East into the national economy where post-war reconstruction programmes got underway. It was heartening to note that even the Sri Lanka Army, unburdened of war, contributed significant manpower and expertise to these endeavours, emphasising the Government’s strong commitment to revitalising war-ravaged areas. There was also a solid start to investment islandwide in long neglected infrastructure.

Business too, increased investment, emboldened by the view that the strong economic growth was sustainable, underpinned by the stability of the political environment. Sri Lanka is now clearly “open for business”.

The positive sentiments therefore were amply echoed in the performance of your Company as well with the 2010/2011 financial year seeing the turnover of your Company grow by 14.5% to Rs. 1.5 Bn although at first glance this might seem a little disappointing. However, when viewed in the context and dynamics of our product mix, it was, in fact, quite a remarkable performance.

The strategic decision to exit from the imported Full Cream Milk Powder (FCMP) market in February 2010 in order to focus on our core business saw a reduction in turnover of, at minimum, Rs. 218 Mn (being the FCMP turnover recorded in 2008/2009). This loss of turnover was however, more than recovered by a 30% growth in the liquid milk segment confirming that the decision made by us, was correct. Furthermore, the Government of Sri Lanka has declared an unambiguous objective to increase the production of local fresh milk, whilst reducing the consumption of imported milk powder, envisioning self sufficiency in fresh liquid milk by 2020. Your Company is fully aligned with this objective. Already positioned as one of the largest local private sector processors of fresh milk in the country, it is apt that we remain in the forefront of supporting this noble objective. Indeed, any improvement in the development of the local milk industry will cascade multi-faceted benefits to the economy, not the least of which would be curtailing of the massive amount of foreign exchange lost to something which, by right, we should be doing ourselves.

Operating income for the year under review declined from Rs. 87 Mn to Rs. 77 Mn owing to a marked increase in both distribution and administration expenses. Nevertheless, profit after tax grew by 15% from Rs. 65.5 Mn to Rs. 75.3 Mn. This, of course, is a performance, that we intend improving focussing upon vigorously in the year ahead and therefore considering the need to invest further in your Company, the Board has decided not to declare an interim or final dividend for the 2010/2011 financial year.

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Going forward, the acquisition of a majority stake by Cargills (Ceylon) PLC in November 2010, gives your Company the muscle of a strong and visionary strategic partner, benefits of which will be felt in the coming year and, indeed, deep into the future. Kotmale and Cargills make for an excellent ‘fit’ and there are many areas within operations of both entities where synergies can be leveraged upon. It is planned to consolidate the Group’s requirements for milk collection in the coming year, which will help your Company develop and assure future milk supplies. It is foreseen that certain production facilities can be integrated, thus decreasing cost of production and ensuring prudent cost management. The increasing strength of Food City’s retail presence will be fully leveraged, while investments in modern processing and packing lines are planned as well. With these and other initiatives, your Company is looking towards a future of profitable growth. Indeed there are exciting times ahead.

Your Company is fortunate to be led by a highly competent and dedicated management team, as well as a loyal and diligent workforce. On your behalf, I thank them for their sterling efforts in making Kotmale, the great Sri Lankan brand that it is. Also, I place on record your appreciation of the outgoing Directors for their wise governance and service to the Company over the years, while formally welcoming the incoming Board.

(Signed)Stuart YoungChairman

06th July 2011

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CEO’s Review

The mindset is positive; the mood upbeat and Sri Lanka is firmly on its path to meeting its goal and vision of becoming a regional hub in five key economic drivers. The last year has seen the country position itself very keenly as a Middle Income Country, asserting its status as an emerging economy that will contribute significantly to the growth of the region. The travails of the thirty year war is definitely a circumstance of the past, but one which has given the country a renaissance, a new lease of life that is destined to ensure that we as a nation achieve our ambitious targets, while also ensuring that development permeates every part of the country. It is in this very optimistic milieu that I am most pleased to present to you the review of operations for Kotmale Holdings PLC, which too displayed the permeating positivity felt around the country, both quantitatively and qualitatively.

In November 2010, the dynamic retail conglomerate of Cargills (Ceylon) PLC acquired Kotmale Holdings, bringing with it enviable synergies that we can be comfortably leverage upon. This acquisition opens up multi-faceted dimensions of opportunity for Kotmale, while adding the backing, support and resources of a respected and established corporate steward in Sri Lanka into our strategic and operational fabric.

The Dairy IndustryThere has been a concerted effort by the Government to propagate the consumption of liquid milk amongst the nation. The reason for this is that Sri Lanka, as a nation, has habitually become a large consumer of powdered milk, which while being quite a drain on the national treasury due to the high cost of importation and the resultant effects on our foreign exchange, is not the most healthy option compared to the nutritional features prevalent in liquid milk. The Government’s target is to reach self sufficiency in liquid milk production by 2020 although, it can be seen that it will be an extremely challenging task to meet, given the prevalent ground realities. However, it is imperative that the entire country moves towards consumption of liquid milk as the primary habit, while leaving powdered milk as an alternative source, as is the trend practiced by most developing and developed countries.

In 2010, total milk production increased by 6% to 247 Mn liters from 233 Mn liters, which is a marginal 2% increase over last year. This is just 30% of the national requirements of milk. We foresee milk production increasing gradually, due to the lack of resources and the fact that it is only now that some of the primary cattle raising areas like the north and east are coming into the fray. The floods experienced by the country in the east during the latter part of 2010 also posed a significant negative impact on the dairy industry, with nearly 15% of the industry being destroyed. This, for a fledgling industry, can be quite catastrophic as it will take at least a few years for that negative feature to upturn into a tangible contribution.

One of the interventions made by the Government this year was to increase the average producer price of liquid milk twice during the year. The price per liter was increased from Rs. 29.50 in 2009 to Rs. 32.50 per liter and further increased to Rs. 50 per liter with effect from March 2011. The impact of this move has two dimensions. While the dairy farmer gains a better price for his produce and therefore there will be a cascading development for the farmer due to his increased income, this price increase placed liquid milk in a somewhat ill-affordable bracket, which negates the government’s policy of moving the nation towards liquid milk consumption as opposed to powdered milk. I strongly believe that a fine balance must be maintained when dealing with an industry that is still trying to find its feet and therefore, price increases or any other decisions that may impact the industry must be instituted in consultation with the industry.

Financial ReviewThe year has been good for Kotmale Holdings, given that both the external economic environment and the internal initiatives we implemented augured well for our bottom line performance. The strategic initiatives implemented over the last two years, as mentioned in my review of last year as well, gained fruition this year, as seen in the noteworthy results that your Company has posted.

Two of the key features in our positive results could be attributed to the extraordinary revival of the tourism industry which naturally saw a higher demand for our cheese and other related products and the planned

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re-launch of our entire product portfolio being effected during the year, with our brand gaining significant top of the mind recall and awareness as a result. In addition, we were in continuous mode of increasing efficiencies, productivity, systems and processes, while also emphasizing on quality, expansion, brand development and skill enhancement, which added positively to the ultimate results you see posted by Kotmale Holdings this year.

Turnover increased by 14.5%, an increase into which yoghurt contributed a significant amount, while liquid milk, which represents both UHT and pasteurized milk performed exceptionally well to generate healthy volume growth. The milk powder operation, which generated Rs. 218 Mn in turnover in 2009/10, remained suspended based on a decision made last year. But the excellent performance posted by our liquid milk product portfolio negated any impacts felt by the stoppage of the powdered milk production. Therefore, once adjusted after taking this into account, the real turnover growth of liquid milk based products is 30%.

The Company displayed a profit after tax of Rs. 75.3 Mn from last year’s Rs. 65.5 Mn, a growth of 14.9%, while the gross profit increased by 14% to Rs. 328.5 Mn. The share price which increased an extraordinary 260% in 2009/10, further strengthened this year, closing at Rs. 53.50 and showcasing 116% growth. Permeating from this, market capitalisation increased by nearly Rs. 01 Bn, from Rs. 777 Mn to Rs. 1.66 Bn.

While prudently managing our cash flow which resulted in the reduction of finance expenses to lead to a positive cash flow, designed to be invested towards the expansion and development of production facilities, we were most conscious of being pragmatic in our expansion focus. Brand development and penetration leading from enhanced distribution capabilities, remained a priority but was implemented through a focused strategy that now sees our products in nearly every part of the country. These initiatives therefore did see a decline in our operating income from Rs. 87 Mn to Rs. 77 Mn due to the increase in distribution and administrative expenses, but on the converse, also posted healthy volume growth. One other factor contributing towards administrative expenses

are our continuous investment in human resources development and management, which to us remains a priority in ensuring that our business thrives and is sustainable due to a productive, motivated dynamic workforce. The other income increase to Rs. 16.2 Mn is primarily due to an increase in miscellaneous income and adjustments in the creditor account.

Meanwhile, while last year the Company paid out Rs. 16.6 Mn in taxation on dividends, given that we did not declare dividends this year, there is a significant reduction in the taxation component. It must be noted that the reason the company did not declare or pay dividends this year is due to the strategic growth initiatives that were implemented during the year, based on the Strategic Business Plan for the last two years. In the current scenario, your company is extremely confident of the excellent quality of our product portfolio but in ground reality, is competing with large conglomerates. Therefore it is imperative that our brand, as well as our market and expansion strategy is geared to meet and overcome competition. The year saw us invest considerably in infrastructure including machinery, systems, processes and HR development, geared to meet the increase in demand and also cascade to meet the higher volumes envisaged. Therefore, it becomes necessary for the company to plough back its earnings into developing the key drivers that will ensure sustainable growth in the medium to longer term. While our shareholders have not been rewarded with a dividend this year, the strategies infused this year will unequivocally bring in better returns and rewards in the future.

Milk Powder SectorThis segment of our business remained suspended throughout this year, on a strategic decision made as reported in my review of last year. Market dynamics remained not conducive to a re- entry into the market as being a small player, we compete against multi-national milk powder importers and are not equipped with the tools to deal with the wide fluctuations in prices, duty structures and lack of stable policy. World market prices too continuously increased reaching US$ 5,000 per metric ton in March 2011 as detailed in Global Dairy Trade, all features that became tantamount to the company re-visiting the temporary withdrawal strategy.

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While the government did reduce import duty on powdered milk and allowed a retail price increase in tandem, given the above factors, we did feel it is not prudent for us to re-enter the milk powder business once again. Therefore the necessary financial adjustments have been made to provide in full for the investment made by the holding company amounting to Rs. 30 Mn, while also writing off Rs. 40.6 Mn owed by Kotmale Milk Foods Limited, which is a fully owned subsidiary of Kotmale Holdings PLC and handled the powdered milk business within our group.

Given the market milieu, we are now completely exiting from the powdered milk business segment and will concentrate much more on the more lucrative and sustainable liquid milk business segment, especially as it drives the government’s policy of dairy sufficiency by year 2020 and will herald a healthier nation eventually.

Liquid Milk SectorWe have firmly established ourselves on the foundation of being a company whose business is liquid milk and this primary focus places us among the largest milk collectors in the country. This has enabled us to work on an ethos of creating a sustainable future in liquid milk products that will impact not only our business, but the economic features of the nation. However, liquid milk can be a challenging business as it requires a considerable amount of R&D, innovation and technology that must be infused to make it viable.

The collection process especially requires input into improving the cold chain, which is the axis upon which liquid milk collection and processing works upon. This is also where quality controls, healthy and hygienic standards and excellence in best practices must be infused. Kotmale has been extremely cognizant of these challenges and have thus, over the last few years, considerably invested in enhancing and improving the cold chain, which has aided in increasing our collection process to 14 Mn liters this year, from 12 Mn liters collected last year. We established more milk collection centers into our network this year, which augmented our operations, while also upgrading the existing centres with better facilities, to align them with our stringent quality standards.

Our milk collection is currently focused in the central part of Sri Lanka and therefore remained somewhat cushioned to the travails of the devastating floods that affected the east and thus the dairy industry in that area. However, the floods did impact the entirety of the dairy industry to some extent as the demand had to be met by only the existing farmers, which pushed prices up and demand to unmanageable levels. However, our requirements of fresh milk were met, despite these challenges due to a number of below the line initiatives the Company has infused over a long period of time.

Making Farmers SustainableWe are a Company that believes unrelentingly in building strong relationships, the relationships that will withstand the test of time and will be a win-win one for all. It is this ethos therefore that saw us remain somewhat unscathed when the floods in the east impacted liquid milk production considerably and a scarcity ensued. Kotmale continued to get its requirement of liquid milk with few challenges, as our network of 8,000 farmers in the central hill country of Sri Lanka continue to be extremely loyal to the company. This we unequivocally declare is our biggest and most valuable asset given that we have not only founded strong relationships with dairy farmers, but have also ensured that they are equipped with a sustainable income and therefore self development, which ultimately permeates to the larger sphere of economic growth.

We are also actively involved with the farmer families and communities within our network, implementing sustainable community initiatives that positively impact their lives and livelihoods as a measure of strengthening and nurturing the relationships we have already founded.

With the Government’s imperative to make Sri Lanka self-sufficient in dairy requirements, there is increased competition for liquid milk within a still slowly growing market with more companies entering the dairy sector. However, we do believe this will drive development of the industry and improvements of standards and the value chain, ultimately impacting positively on the industry and its dependent farmer community.

CEO’s Review Contd.

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Sales & MarketingVery proud to hold fast to the honour of being at the helm of the liquid milk category, this year’s concerted efforts at ensuring that our extensive product portfolio is accessible to nearly all parts of the country were further emphasized with the strategic partnership we now have within our group via the Food City Supermarket chain. In addition, by strengthening our distribution network and inculcating relationships with the retail network around Sri Lanka, our brand is now among the best known in the liquid milk, ice cream and yoghurt categories, a definite feather in our cap considering that competition is strong among the well established long standing brands.

Having re-launched our brand in July 2010 with a more vibrant and contemporary feel, the eye catching packaging has a definite advantage in standing out amongst the clutter seen in the frozen confectionery and beverage segments in the retail market. We intend to continue investing in brand development and marketing, which remains the foundation to increasing our penetration to all market segments. We are truly proud to have re-entered the hearts and minds of the consumer as a truly Sri Lankan dairy brand.

Driven Towards ExcellenceBeing a company that began on a small but strong foundation, our achievements to-date are certainly impressive. However, there have been challenges that have been overcome in this journey due to the enthusiastic attitude that has always been displayed by our vibrantly dynamic team. Ensuring that we remain focused on our vision and keeping our feet firmly on the ground while traveling towards that vision is solely attributed to our team, who have displayed immense motivation and commitment to meeting our goals.

The Journey from HereWe are now firmly entrenched as a key player in the dairy industry of Sri Lanka, further augmented by our strategic relationship honed this year through the Cargills (Ceylon) PLC acquisition. Our intention is to develop Kotmale into a truly world class operation,

where state of the art manufacturing processes will be complimented with excellence in innovation, quality, skill and IT processes and systems designed to create a unique product portfolio that will exceed customer satisfaction and consumer expectations.

We intend to leverage on the synergies of the chain of Cargills Supermarkets, while improving our distribution network for added accessibility and visibility, which will surely take our products into areas that have hitherto remained untapped. Other group synergies, including procurement, management expertise and resource allocation will be leveraged upon, in turn driving prudent cost management that will reflect on our bottom line.

Brand development will continue as a priority as we are strong believers that it is top of the mind recall that creates the demand for our product, while continuous HR development is billed at the zenith of our planned agenda for growth. We also see immense growth in the leisure sector, given the Government’s target of earmarking 2.5 Mn tourist arrivals into Sri Lanka by 2016. Given the inroads we have already made into providing dairy products and in particular specialty products to the sector, we will nurture the relationships already founded, working closely with this industry to develop products aligned to the guest profiles envisaged, while adding more to our customer portfolio in this sector.

As mentioned earlier, while the backbone of our farmer network remains in the central hills, we intend to venture to the conventional dairy farming areas of the north and east, to expand our milk collection presence. This will add flexibility into our operations and collection capabilities. We also intend to infuse additional investment into this milk collection network as we envisage considerable growth paradigms by way of adding to our nation’s liquid milk capacity, while creating a sustainable foundation via employment generation and entrepreneurial competencies.

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AppreciationsHaving been founded as a family company thirty years ago, on the simple premise of uplifting the Sri Lankan dairy industry and thereby underprivileged dairy farmers, Kotmale is an entity that showcases the true entrepreneurial spark and indomitable Sri Lankan spirit. Having undergone numerous challenges and overcome them, today, Kotmale stands as a reflection of that vision and leadership, a Company that has gone beyond compliance in standards and quality and created a product portfolio that is truly outstanding. I place on record my greatest admiration to Mr. C T A Schaffter and his family who built this Company and made it ready to take its rightful place as a leader in the national dairy industry via the Cargills conglomerate.

The acquisition and transition process was conducted in an immensely seamless manner and it would be remiss of me if I do not commend both the previous and current Board of Directors for ensuring that the transition process was smooth and orderly, with minimum challenges encountered. I would also like to thank the previous Board of Directors for the guidance and leadership they extended to me over the last year, which is seen in the good results posted for the year. I warmly welcome the new Board of Directors and while appreciating their valuable input since the acquisition, look forward to working with a truly committed corporate steward to take this company to the great heights it can aspire to achieve.

My team has been exemplary, supporting me and ensuring that we meet our targets which has seen us gain inroads into our market share and continue as number one in the liquid milk industry. And while thanking the team, am also most appreciative of our valued business partners including our customers and farmer network who have always been confidently supporting our endeavours, encouraging us to reach greater heights all the time.

I look forward to an year of success, where Kotmale will truly make a mark in the country’s economic progress, while also playing its destined role of a proactive corporate citizen whose presence around the country goes beyond the boundaries of business, building into the hearts and minds of the people to create sustainable development foundations.

(Signed)M S J FernandoDirector/CEO

06th July 2011

CEO’s Review Contd.

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Mr. Stuart Young - * Chairman

Mr. Stuart Young had a 37 year career with the Nestle Group where he held senior management positions in sales, marketing and general management, spanning the four continents of Europe, Australia, Asia, and Africa, before becoming Managing Director and CEO of Nestle Lanka in November 2002, from which position he retired in October 2008. He is well known in Sri Lanka where he spends time as an independent business consultant.Appointed w.e.f. 05th January 2011

Mr. V R Page - Deputy Chairman

Mr. Ranjit Page is the Chairman of Cargills Quality Foods Limited (CQF, parent company of Kotmale Holdings PLC), Deputy Chairman and CEO of Cargills (Ceylon) PLC (holding company of CQF) and Managing Director of C T Holdings PLC (holding company of Cargills (Ceylon) PLC). He possesses over 28 years of management experience with expertise in food retailing, food service, and manufacturing, having introduced the concept of supermarketing to the Sri Lankan masses. He also serves on the Board of several other companies. Appointed w.e.f. 05th January 2011

Mr. M I Abdul Wahid - Managing Director

Mr. M Imtiaz Abdul Wahid is the Managing Director and Deputy CEO of Cargills (Ceylon) PLC and is an Associate Member of the Institute of Chartered Accountants of Sri Lanka and a Fellow Member of the Chartered Institute of Management Accountants (UK). He has been involved in the operations of Cargills (Ceylon) PLC in an executive capacity at different intervals, progressively at higher levels (appointed Director 1997 and Deputy Managing Director in 2001) spanning a period of 24 years, leaving the services of the Company for employment abroad on two occasions in between whereby he also gained valuable exposure holding a number of senior management positions in companies overseas.Appointed w.e.f. 05th January 2011

Mr. M S J Fernando - Executive Director / Chief Executive Officer

Mr. Jude Fernando possesses over 20 years of experience in the fields of Supply Chain Management, Finance, Strategic Planning and International Marketing. Prior to joining Kotmale Holdings PLC as CEO, Mr. Fernando held the position of Director – Supply Chain, at Hemas Manufacturing (Private) Limited. He joined the Hemas Group following a career in Finance at Royal Ceramics PLC where he headed the finance operations as Finance Manager. Mr. Fernando was also a Director of Dunamis Capital PLC. He is a Fellow Member of the Chartered Institute of Management Accountants (UK), a member of the Chartered Institute of Marketing (UK) and holds a Masters Degree in Business Administration from the University of Wales.

Mr. P S Mathavan - Executive Director

Mr. Prabhu Mathavan is the Executive Director - Finance at Cargills (Ceylon) PLC. He is an Associate Member of the Chartered Institute of Management Accountants (UK) and the Institute of Chartered Accountants of Sri Lanka. He also holds a Bachelor’s Degree in Commerce. He possesses over 18 years of experience in the fields of Finance, Auditing, Accounting and Taxation.Appointed w.e.f. 05th January 2011

Mr. A T P Edirisinghe - *Director

Mr. Priya Edirisinghe is a Fellow Member of the Institute of Chartered Accountants of Sri Lanka and a Fellow Member of the Chartered Institute of Management Accountants (UK) and holds a Diploma in Commercial Arbitration. He was the Senior Partner of HLB Edirisinghe & Co., Chartered Accountants, and currently serves as Consultant / Advisor. He counts over 41 years of experience in both public practice and in the private sector. He serves on the Board of a number of other listed and non-listed companies, including Cargills (Ceylon) PLC and C T Holdings PLC.Appointed w.e.f. 05th January 2011

Profile of Directors

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Mr. Sunil Mendis - *Director

Desamanya Sunil Mendis was formerly the Chairman of Hayleys Group, and the immediate former Governor of the Central Bank of Sri Lanka. He possesses around 44 years of wide and varied commercial experience most of which has been in very senior positions. He also serves on the Boards of Cargills (Ceylon) PLC and C T Holdings PLC.Appointed w.e.f. 05th January 2011

Mr. J C Page - **Director

Mr. Joseph Page is the Deputy Chairman/Managing Director of C T Land Development PLC. He is also Executive Director of C T Properties Limited. Prior to joining C T Land Development PLC he was Executive Director of Millers Limited. He has over 28 years of management experience in the private sector. He also serves on the Boards of Cargills (Ceylon) PLC and C T Holdings PLC.Appointed w.e.f. 01st May 2011

Mrs. Manjula Mathews - Executive Director

Mrs. Mathews possesses over 22 years experience in General Management and Finance, both in Sri Lanka and overseas. She serves as Managing Director of Dunamis Capital PLC, a diversified conglomerate, and as a Director of other Dunamis subsidiaries. Mrs. Mathews was formerly the Finance Director at Janashakthi Insurance PLC. She continues to hold a Non-Executive position at Janashakthi Insurance PLC. Mrs. Mathews is a fellow Member of the Chartered Institute of Management Accountants of (UK), and holds a Masters Degree in Business Administration from the University of Cambridge (UK).Resigned w.e.f. 05th January 2011

Mr. Dinesh Schaffter - *Director

Mr. Dinesh Schaffter counts over 21 years of experience in the Financial Services and Manufacturing sectors. He also serves as a Director of Dunamis Capital PLC, and its subsidiaries. Mr. Schaffter is an Associate Member of the Chartered Institute of Management Accountants (UK), and holds a Bachelor of Law (Honours) Degree (LLB) from the United Kingdom.Resigned w.e.f. 05th January 2011

Mr. Ramesh Schaffter - ** Director

Mr. Ramesh Schaffter is a Fellow member and Former Council Member of the Chartered Institute of Management Accountants Sri Lanka and an Associate member of the Chartered Institute of Marketing. Mr. Ramesh is a versatile personality who has over 21 years experience in Finance and Marketing. He has served on the Boards of several public listed and unlisted companies as well as being the incumbent Treasurer of Habitat for Humanity Sri Lanka, an NGO engaged in providing housing for low income families.Appointed w.e.f. 05th August 2010Resigned w.e.f. 05th January 2011

Mr. A D E I Perera - ** Director

Mr. Eardley Perera is a Chartered Marketer and Graduate of the Chartered Institute of Marketing, UK. He has undergone management training in Sweden, UK, South Korea, the Philippines and Singapore. He has served on the Board of several public listed and unlisted companies. He is a member on the Board of Study of the Postgraduate Institute of Management, University of Sri Jayewardenepura (PIM), and is actively engaged in management education and consultancy.Appointed w.e.f. 05th August 2010Resigned w.e.f. 05th January 2011

Mr. Nihara E Rodrigo P. C. - * Director

Mr. Rodrigo’s professional career span of over 31 years is enriched with diversified expertise and experience in various fields including different aspects of law and e-commerce. He serves as the Chairman of the Grants Board of the Information and Communication Technology Agency of Sri Lanka - Capacity Building Program. He was appointed as President’s Counsel in May 2010. Mr. Rodrigo also serves as a Director of Dunamis Capital PLC and its listed subsidiaries.Resigned w.e.f. 05th January 2011

* Independent Non Executive** Non Independent Non Executive

Profile of Directors Contd.

15

Corporate Governance

The disclosures below demonstrate the extent to which the principles of good corporate governance are complied with within the Group. In addition, the Board of Directors to the best of its knowledge and belief is also satisfied that all statutory payments due to the Government, other regulatory institutions, and related to the employees, have been made on time.

The Company’s adherence to the corporate governance rules as required by Section 7.10 of the Listing Rules of the Colombo Stock Exchange:

Corporate Governance Rule Compliance Status

Details

7.10.1 Non-Executive Directors(a) The Board of Directors of a Listed Entity shall include at

least,i) Two non-executive directors; orii) Such number of non-executive director’s equivalent to

one third of the total number of directors whichever is higher.

Complied Company has 08 Directors on its Board, 04 of whom arenon-executive directors.

(b) The total number of directors is to be calculated based on the number as at the conclusion of the immediately preceding Annual General Meeting.

Complied 01st April 2010 to 05th August 2010: 02 non-executive and 02 executive

05th August 2010 to 05th January 2011: 04 non-executive and 02 executive

05th January 2011to 01st May 2011: 03 non-executive and 04 executive

01st May 2011 to date: 04 non-executive and 04 executive

(c) Any change occurring to this ratio shall be rectified within ninety (90) days from the date of the change.

Complied There has not been any period of non compliance as explainedabove.

7.10.2 Independent Directors(a) Where the constitution of the Board of Directors includes

only two non-executive directors as mentioned above, both such non-executive directors shall be ‘independent’. In all other instances two or 1/3 of non-executive directors appointed to the Board of Directors, whichever is higher shall be ‘independent’.

Complied 01st April 2010 to 05th August 2010: one of two of non executive directors (50%) independent.

05th August 2010 to 05th January 2011: Two of four non executive directors (50%) independent.

05th January 2011 to 30th April 2011: 02 of 03 non executive directors (66%) are deemed independent.

01st May 2011 onwards: 02 of 04 non- executive directors (50%) are deemed independent.

16



Details

(b) The Board shall require each non-executive director to submit a signed and dated declaration annually of his/her independence or non-independence against the specified criteria.

Complied Each non-executive director has provided a signed and dated declaration of his/ her independence or non-independence against the criteria laid down in the listing rules.

7.10.3 Disclosures Relating to Directors(a) The Board shall make a determination annually as to the

independence or non-independence of each non-executive director based on such declaration and other information available to the Board and shall set out in the annual report the names of directors determined to be ‘independent.’

Complied 02 of 04 non-executive directors are deemed independent as per the criteria set.

(b) In the event a director does not qualify to be designated as being ‘independent’ according to any of the criteria set out below, but if the board, taking account of all the circumstances, is of the opinion that the director is nevertheless ‘independent’, the board shall specify the criteria not met, and the basis for its determination, in the annual report.

Complied 02 non-executive directors are deemed independent by the Board and the criteria not met and the basis for such determination is set out in Note on page 22.

(c) In addition to the disclosures relating to the Independence of a director set out above, the Board shall publish in its annual report a brief resume of each director on its board which includes information on the nature of his/her expertise in relevant functional areas.

Complied Please refer profile of directors on pages 13 and 14.

(d) Upon appointment of a new director to its board, the Entity shall forthwith provide to the exchange a brief resume of such director for dissemination to the public. Such resume shall include information on the matters itemized in paragraphs (a), (b) and (c) above.

Complied Mr. Ramesh Schaffter andMr. A D E I Perera were appointed on 05th August 2010, Mr. Stuart Young, Mr. V R Page, Mr. M I Abdul Wahid, Mr. P S Mathavan, Mr. A T P Edirisinghe and Mr. Sunil Mendis were appointed on 05th January 2011 and Mr. J C Page was appointed on 01st May 2011, and intimated to the Colombo Stock Exchange forthwith.

Corporate Governance Contd.

17


Details

7.10.5 Remuneration CommitteeA listed entity shall have a remuneration committee in conformity with the following:

(a) Composition The remuneration committee shall comprise;

(i) a minimum of two independent non-executive directors (in instances where an Entity has only two directors on its Board); or

(ii) of non-executive directors a majority of whom shall be independent, whichever shall be higher.

In a situation where both the parent company and the subsidiary are ‘Listed Entities’, the remuneration committee of the parent company may be permitted to function as the remuneration committee of the subsidiary.

However, if the parent company is not a listed entity, then the remuneration committee of the parent company is not permitted to act as the remuneration committee of the subsidiary. The subsidiary shall have a separate remuneration committee.

One non-executive director shall be appointed as Chairman of the committee by the board of directors.

Complied

N/A

N/A

Complied

The new remuneration committee was appointed on 03rd June 2011 and comprise 02 non-executive directors who are deemed independent.

The remuneration committee has been appointed specific to the Company.

N/A

The committee is chaired by Mr. Sunil Mendis, non-executive director.

(b) Functions The remuneration committee shall recommend the

remuneration payable to the executive directors and Chief Executive Officer of the Listed Entity and/or equivalent position thereof, to the board of the listed entity which will make the final determination upon consideration of such a recommendation.

Complied The Committee will recommend to the Board the remuneration payable to the Executive Directors and the Chief Executive Officer. In recommending an appropriate remuneration package the primary objective of the Committee is to attract and retain the services of highly qualified and experienced personnel.

18



Details

(c) Disclosures The annual report should: Set out the names of directors

(or persons in the parent company’s committee in the case of a Group) comprising the remuneration committee, contain a statement of the remuneration policy and set out the aggregate remuneration paid to executive and non-executive directors.

The term “remuneration” shall make reference to cash and all non-cash benefits whatsoever received in consideration of employment with the Listed Entity (excluding statutory entitlements such as Employees Provident Fund and Employees Trust Fund).

Complied The new remuneration committee was appointed on 03rd June 2011 and comprise 02 independent non executive directors as follows;Mr. Sunil Mendis (Chairman)Mr. A T P Edirisinghe

7.10.6 Audit CommitteeA listed entity shall have an audit committee in conformity with the following:

(a) Composition The audit committee shall comprise;

(i) a minimum of two independent non-executive directors (in instances where an Entity has only two directors on its board); or

(ii) non-executive directors a majority of whom shall be independent, whichever shall be higher.

In a situation where both the parent company and the subsidiary are ‘Listed Entities’, the audit committee of the parent company may function as the audit committee of the subsidiary.

However, if the parent company is not a Listed Entity, then the audit committee of the parent company is not permitted to act as the audit committee of the subsidiary. The subsidiary should have a separate audit committee.

One non-executive director shall be appointed as Chairman of the committee by the Board of Directors.

Unless otherwise determined by the audit committee, the Chief Executive Officer and the Chief Financial Officer of the Listed Entity shall attend audit committee meetings.

The Chairman or one member of the committee should be a member of a recognized professional accounting body.

Complied

N/A

N/A

Complied

Complied

Complied

The audit committee was appointed on 03rd June 2011 and comprise 02 independent non-executive directors as follows;Mr. A T P Edirisinghe (Chairman)Mr. Sunil Mendis

The audit committee has been appointed specific to the Company.

N/A

The committee is chaired by Mr. A T P Edirisinghe, non-executive director.

CEO and CFO attend all meetings.

The Chairman of the committee is a member of ICASL and CIMA (UK).


19


Details

(b) FunctionsShall include,

(i) Overseeing of the preparation, presentation and adequacy of disclosures in the financial statements of a Listed Entity, in accordance with Sri Lanka Accounting Standards.

(ii) Overseeing of the Entity’s compliance with financial reporting requirements, information requirements of the Companies Act and other relevant financial reporting related regulations and requirements.

(iii) Overseeing the processes to ensure that the Entity’s internal controls and risk management are adequate to meet the requirements of the Sri Lanka Auditing Standards.

(iv) Assessment of the independence and performance of the Entity’s external auditors.

(v) To make recommendations to the Board pertaining to appointment, re-appointment and removal of external auditors and to approve the remuneration and terms of engagement of the external auditors.

Complied

Complied

Complied

Complied

Complied

The audit committee was appointed on 03rd June 2011.

(c) DisclosuresThe names of the directors (or persons in the parent company’s committee in the case of a group company) comprising the audit committee should be disclosed in the annual report.

The committee shall make a determination of the independence of the auditors and shall disclose the basis for such determination in the annual report.

The annual report shall contain a report by the audit committee, setting out the manner of compliance by the Entity in relation to the above, during the period reviewed in the annual report.

Complied

N/A

N/A

The audit committee comprise 02 independent non-executive directors as follows;Mr. A T P Edirisinghe (Chairman)Mr. Sunil Mendis

Audit committee appointed on 03rd June 2011.

Audit committee appointed on 03rd June 2011.

20


Company’s adherence to the Provisions of Rule 7.6 as required by the Listing Rules of the Colombo Stock Exchange on disclosure in Annual Reports of Listed Entities:


Details

A Listed Entity must include in its annual reports and accounts, inter alia;

(i) Names of persons who were Directors of the Entity during the financial year.

Complied Please refer inner back cover for the names of directors of the company.

(ii) Principal activities of the Entity and its subsidiaries during the year and any changes therein.

Complied Please refer note 01 in page 38, in notes to the financial statements.

(iii) The names and the number of shares held by the 20 largest holders of voting and non-voting shares and the percentages of such shares held.

Complied Please refer Investor Relations Supplement on pages 56 and 57.

(iv) The public holding percentage. Complied Please refer Investor Relations Supplement on page 56.

(v) A statement of each director’s holding and Chief Executive Officer’s holding in shares of the Entity at the beginning and end of each financial year.

Complied Please refer page 31.

(vi) Information pertaining to material foreseeable risk factors of the Entity.

Complied Please refer report on Risk Management on pages 23 to 25.

(vii) Details of material issues pertaining to employees and industrial relations of the Entity.

N/A No material issues pertaining to employees and industrial relations.

(viii) Extents, locations, valuations and the number of buildings of the Entity’s land holdings and investment properties.

Complied Please refer note 10 on page 46.

(ix) Number of shares representing the Entity’s stated capital. Complied Please refer page 56, Investor Relations Supplement.

(x) A distribution schedule of the number of holders in each class of equity securities and the percentage of their total holdings in the specified categories.

Complied Please refer page 56, Investor Relations Supplement.


21


Details

(xi) The following ratios and market price information.

EQUITY1. Dividend per share2. Dividend pay out3. Net asset value per share4. Market value per share - Highest and lowest value recorded - Value as at the end of financial year.

DEBT (Only if listed)

Complied

Complied

N/A

Please refer page 55, Five year financial summary.

Please refer page 56, Investor Relations Supplement.

N/A

(xii) Significant changes in the Entity’s or its subsidiaries’ fixed assets and the market value of land, if the value differs substantially from the book value.

N/A N/A

(xiii) If during the year the Entity has raised funds either through a public issue, right issues, and private placement:

a. A statement as to the manner in which the proceeds of such issues has been utilized.

b. If any shares or debentures have been issued, the number, class and consideration received and the reason for the issue; and,

c. Any material change in the use of funds raised through an issue of securities.

N/A N/A

(xiv) The following information should be disclosed in respect of each employee’s share ownership or stock option scheme.

- Total number of shares allotted during the financial year- Price at which shares were allotted- Highest, lowest and closing price of the share recorded

during the financial year- Details of funding granted to employees (if any)

N/A N/A

(xv) Disclosures pertaining to Corporate Governance practices in terms of Rules 7.10.3, 7.10.5 c. and

7.10.6 c. of section 7 of the Rules.

Complied Please refer page 15 to 19 for the disclosures in terms of Section 7.10.

22



Details

(xvi) Related Party transactions exceeding 10% of the Equity or 5% of the total assets of the Entity as per Audited Financial Statements, whichever is lower.

Details of investments in a Related Party and/or amounts due from a Related Party to be set out separately.

The details shall include, as a minimum:a. The date of transactionb. The name of the Related Partyc. The relationship between the Entity and the Related Partyd. The amount of the transaction and terms of the transactione. The rationale for entering into the transaction

Complied Please refer Note 24.2, Page 53.

Note:Based on the declarations provided by the non-executive directors, the Board has decided the following directors as independent:

Mr. A T P Edirisinghe, andMr. Sunil Mendis

who, in spite of being Directors of C T Holdings PLC (the ultimate parent company) and Cargills (Ceylon) PLC (which is the sole owner of Cargills Quality Foods Ltd.; holding company of KHP), the Board has nevertheless determined to be independent considering their credentials and integrity.


23

IntroductionRisk management is a pivotal factor of Kotmale Holdings PLC businesses and is an essential component of its operations. It is of paramount importance in safeguarding the interest of all stakeholders. To keep risk management at the centre of the executive agenda, it is embedded in the everyday management of the business.

The management considers each business risk in the context of the Group strategy by identifying the potential upside and downside to the Group businesses. Any identified downside is subject to mitigating measures and any upside is fully made use of to strengthen the competitive position of the Group. Considering the current situation of the Group businesses, future business plans as well as the economic prospects of the country, the Group has addressed the risk management as a vital cog within the Group’s financial stability imperatives. Risks and methodology of mitigation are presented here in the areas of business (operation), financial reporting and compliance with applicable laws and regulations.

Administrative support for risk managementCentralised functions Kotmale Holdings PLC group being part of CT Holdings PLC group and Cargills (Ceylon) PLC group, the Board, as the focal point in managing the business, has been vested with the final responsibility of managing the risks that the group encounters. A corporate management committee (CMC) established at parent company level has been set up to assist the Board to execute this responsibility. The CMC with the help of the senior management of Kotmale Holdings PLC group decides the risk profile of the Group. It also evaluates the business proposals in view of the existing risk appetite and keeps the Board informed of the suitability of the business proposals in risk perspective. The CMC reviews the operational issues tabled in the monthly meetings to identify the key risks faced by the Group including their impact, likelihood and the controls and procedures implemented to mitigate these risks. The Board is required to take decisions that would increase the intrinsic value of the Group in terms of investing in capital assets which would enhance its future earnings capacity. In this perspective the tolerable risk levels are defined by the CMC provided those investments show commercial justification, striking a balance between risk

and return. In addition, the management letter issued by external auditors is reviewed by the CMC which will direct to the Board audit committee for their perusal. Any material findings adversely effecting the smooth operation of the business are addressed in detail and corrective actions taken.

Legal functionThe Group obtains the service of a centralized legal department established at parent company level to ensure that the Group complies with laws and regulations. The department reports on a monthly basis to the Board verifying compliance with laws and regulations.

All legal agreements are thoroughly scrutinized by competent legal officers while the Company Secretary ensures compliance with the Companies Act.Potential negative impacts on the business are assessed and necessary action plans are formulated to mitigate the risks to the business resulting from laws and regulations. The opinion of the tax consultants pertaining to all tax matters, is considered and necessary steps are taken to ensure statutory requirements are fully complied with.

Financial reporting functionDocumentation and reporting also plays a key role in managing risk. The financial reporting division has been set up to ensure all financial reporting aspects are addressed. The division co-ordinates with relevant authorities and institutions. The Board audit committee reviews reports of all financial and related information and disseminate such data.

Internal controls and internal audit functionThe Group has put in place a system of internal control to assist in achieving the management’s objective of ensuring orderly and efficient conduct of business, safeguarding of assets, the prevention and detection of fraud and error, timely preparation of reliable financial information, and compliance with relevant laws and regulations. This function would primarily look into matters such as monitoring of internal control, examination of financial and operating information, review of the efficiency and effectiveness of the operation, and review compliance with legal and regulatory requirements.

Risk Management

24


Risk Mitigating Actions

Business riskThe business risk management is a dynamic process due to the constant change and complexity in the operating environment of the Group. The business operations of the Group and performance are subject to a variety of risk factors.

The dairy business is operating in a competitive environment and this could contrast the margin on sales and thereby exert additional pressures to meet planned objectives.

Failure in either of the above main areas could have an adverse effect on the Group’s financial results.

Management constantly monitors and evaluates risk factors in order to respond effectively. The manufacturing facilities are maintained according to food manufacturing standards.

To meet the Group objectives we have to compete with rivals in areas including price, product range, quality and service.

The Group aim is to have a broad appeal in price and range so that the Group can compete effectively in different markets. The Group monitors performance against a range of measures which customers tell us are critical to their consumption and we constantly monitor customer perceptions of us and our rivals to ensure we respond as quickly as needed.

Reputational riskFailure to protect the Group’s reputation and brand could lead to a loss of trust and confidence. This could result in an erosion of the customer base and affect the ability to recruit and retain high-calibre people.

Loyalty to the Kotmale brand has helped in development of business over the period. We recognise the commercial imperative to safeguard the interests of all our stakeholders and avoid the loss of such loyalty. We engage with stakeholders in every sphere to take into account their views, and endeavor to develop strategy that reflects their interests. We try to ensure that our strategy reflects those interests.

Product safetyThe safety and quality of our products is of paramount importance to Kotmale as well as being essential to maintenance of our customer trust and confidence. A breach in confidence could shrink our customer base and hence our financial results.

The Group has detailed and established procedures for ensuring product integrity at all times. There are strict product safety processes in place. The Group works in partnership with suppliers to ensure mutual understanding of the standards required, and also monitor developments in areas such as health, safety and nutrition in order to respond appropriately to changing customer trends and new legislation.

Health and safety risksProvision of adequate safety for our staff and customers is of the utmost importance to us as the inability to provide such facilities would result in injuries or loss of life that cannot be measured in financial terms.

The Group operates stringent health and safety processes in line with best practices in manufacturing facilities and offices, which are monitored and audited regularly.

Risk Management Contd.

25

Risk Mitigating Actions

IT systems and infrastructureThe business is dependent on efficient information technology (IT) systems.

The Group recognises the essential role that IT plays across our operations in allowing us to trade efficiently through the implementation of effective IT solutions. We have extensive controls in place to maintain the integrity and efficiency of our IT infrastructure and to ensure consistency of delivery, and all relevant staff are effectively engaged to mitigate IT related risks through effective policy and procedures as well as increased awareness.

Regulatory and political environmentDue to the diverse nature of the businesses, we are subject to a wide variety of regulations prevailing in the country. Political uncertainties in the country could impact adversely on us.

Uncertainties in the external environment are considered when developing strategies and reviewing performance. We remain vigilant about future changes. As part of our day-to-day operations we engage with government and non-government organizations to ensure the views of our customers and employees are represented and try to anticipate and contribute to important changes in public policy whenever possible.

Funding and liquidityThe Group finances its operations by a combination of retained earnings and via long term and short term borrowings. We need to ensure the continuity of funding and to arrange funding ahead of requirements and to maintain sufficient unutilized committed bank facilities.

The Group maintains a portfolio of banking institutions to cater to all funding requirements and to obtain them on favorable terms. Healthy relationship with the bankers makes borrowing at comparatively short notice more feasible.

Interest rate riskThe Group needs to limit its exposure to increases in interest rates while retaining the opportunity to exploit interest rate reductions.

The Group manages interest rate fluctuations with an appropriate mix of fixed and variable rate debts through a centralized treasury management function, where appropriate.

Credit riskThe Group is exposed to credit risk by the nature of the business. There would be an adverse impact on the liquidity position as a result of payment delays and non-payment by debtors.

The Group is committed to neutralize the risk through a rigorous process of credit management. The Group has effective follow up and collection practices and strictly adheres to business specific credit policies.

Foreign exchange rate riskThe Group exposure to this risk is minimal as we do not have much in the nature of foreign business activities. However, we are faced with this risk on import of raw material, plant, machinery and equipment.

The Group manages foreign exchange exposure through appropriate financial risk management techniques.

26


Sustainability Report

Sustainability Kotmale Holdings PLC is Sri Lanka’s third largest milk collector purchasing over 14 million liters of milk annually directly sourced from its over 8,000 strong network of smallholder dairy farmers across central Sri Lanka.

Kotmale has long understood that its position as a strong dairy brand is directly linked with its engagement with Sri Lanka’s dairy farmers and their development. The Company’s engagement with dairy farmers goes back to 1979 and from its inception has been a holistic one. The Company whilst providing them a stable market and standard price through a cooperative style farmer society system has also taken steps to empower them with technical inputs and assistance. Animal health and hygiene is critical in maintaining our stringent quality standards. Our technical team therefore becomes an integral link in not only imparting knowledge, skills and no-how but also in forging a strong bond between the farmer and the company. The resulting increase in productivity and quality has had a direct impact on the national dairy industry.

Many of these farmers have seen their lives turn around with their relationship with Kotmale. The tangible development seen within the farmer families and communities has resulted in a firm loyalty and commitment towards Kotmale. This loyalty in turn has enabled the Company to build a legendary reputation as national dairy production company delivering quality wholesome products.

Quality, Research & DevelopmentThe quality control system that encompasses our entire manufacturing process, from raw milk collection to packaging is comprehensive. Each stage of production is subjected to a rigorous testing and approval process, ensuring the end product is in line with food regulatory standards.

Our focus on quality and food safety goes well beyond the sourcing of raw material and setting standards to an overall supply chain and production management system. Our dedicated quality assurance team maintains a significant focus on ensuring the efficiency of the cold chain whereby storage facilities at production plants,

delivery vehicle temperatures, hygiene standards, logistical planning and the procedure of loading and unloading of these perishable are consistently monitored. The Company’s quality control system endeavors to ensure that auditing and monitoring of distributor facilities in a network that spans across the island reaching groceries, restaurants, supermarkets, canteens etc.

People DevelopmentOurs is a product that has the warm and proactive intervention of people from the start to finish. From the careful rearing of the cows that is source of all the goodness in our products, the farmer who is empowered by our relationship, the three hundred strong team that nurtures the vision of Kotmale, to the discerning consumer who enjoys our product range, we are a company driven by people.

Our team is a talented one, specialized in creating some of the most unique and in some categories the pioneering products in the market. While training and development remains a high priority in the Kotmale work environment, the company also creates a culture of knowledge and learning where open dialogue, proactive participation and team spirit is advocated. Our team is encouraged to extend its commitment from that of an employee to a stakeholder and thereby an overall spirit of entrepreneurship is cultivated.

The commitment of the Kotmale team has enabled the company to meet and surpass its competition. The team is consistently geared for the future with a pragmatic and forward thinking mindset.

27

Financial Reports

Annual Report of the Directors on the Affairs of the Company .................................... 29Statement of Directors’ Responsibilities .............. 32Independent Auditors’ Report .............................. 33Income Statement ............................................... 34Balance Sheet ..................................................... 35Statement of Changes in Equity .......................... 36Cash Flow Statement .......................................... 37Notes to the Financial Statements ....................... 38

28


29

The Directors are pleased to submit the Annual Report together with the audited financial statements of Kotmale Holdings PLC, and consolidated audited financial statements of the Group, for the year ended 31st March 2011.

Review of the year The Chairman’s statement and CEO’s review describe in brief the Group’s affairs, performance and important events of the year.

Activities The principal activities of the Group are the manufacturing and distribution of dairy products and the packeting and distribution of milk powder

Financial statementsThe audited financial statements include the income statements, balance sheets, statement of changes in equity and notes to the financial statements of the Company and the Group for the financial year ended 31st March 2011 and they are given on pages 34 to 54 forming an integral part of the Annual Report of the Board. Auditors’ report The auditors’ report is set out on page 33. Accounting policies The accounting policies adopted in the preparation of the financial statements are given on pages 38 to 43. There were no significant changes to the accounting policies of the Group during the year.

An interim dividend of 2/= per share (Rs. 62,800,000) was paid on 05th November 2009, and final dividend of 2/= per share (Rs.62,800,000) was paid on 16th August 2010 for the year ended 31st March 2010. (This will be reflected in the subsequent year’s financial statements. (please refer table below)

Reserves After the above mentioned appropriations, the total reserves of the Group stand at Rs. 233 Mn. (2010 - Rs. 220 Mn.), while the total reserves of the Company stand at Rs. (70) Mn. (2010 - Rs. 66 Mn.). Stated capital Stated capital of the Company as at 31st March 2011 was Rs. 314 Mn. The details of the stated capital are given in note 17 to the financial statements on page 50. Capital expenditureThe Group’s capital outlay on property, plant and equip-ment amounted to Rs. 36 Mn (2010 - 23 Mn) while as in 2010 there was no capital outlay by the Company on property, plant and equipment (2010 - Nil).

Movements of property, plant and equipment during the year are given in note 10 to the financial statements on pages 46 and 47.

Market value of properties The Group land and buildings were revalued as at 31st March 2009. Details are given in note 10 to the financial statements on pages 46 and 47.

Annual Report of the Directors on the Affairs of the Company

Results and Dividends Group Company For the year ended 31st March 2011 2010 2011 2010 Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000

Profit for the year after taxation amounted to; 75,283 65,505 (72,776) 132,870 The profit attributable to shareholders was; 75,283 65,505 (72,776) 132,870 To which profit brought forward from previous year is added: 86,582 83,877 62,851 (7,219)Leaving an amount available to the Company for appropriation 161,865 149,382 (9,925) 125,651 From which your Directors have made appropriations as follows: Dividend paid for the year ended 31st March 2010 Interim 2/= per share - (62,800) - (62,800)Final 2/= per share (62,800) - (62,800) -Leaving an unappropriated balance, to be carried forward, of 99,065 86,582 (72,725) 62,851

30


Shareholdings The Company is a subsidiary of C T Holdings PLC and there were 1,847 registered shareholders as at 31st March 2011 (2010 - 1,415).

An analysis of shareholdings according to the size of holding and the names of the 20 largest shareholders are given on pages 56 and 57.

Interest register The company maintains an Interest Register conforming to the Provisions of the Companies Act No. 7 of 2007.

AuditorsThe Company’s Auditor during the period under review was Messrs Nihal Hettiarachchi & Company, Chartered Accountants. Fees were paid as disclosed in note 07 to the financial statements. As far as the Directors are aware, the auditors do not have any relationship (other than that of an auditor) with the Company or any of its subsidiaries other than those disclosed in the above note.

A resolution proposing Messrs KPMG Ford, Rhodes, Thornton & Co., Chartered Accountants, to be appointed as auditor of the Company and its subsidiaries for the financial year 2011/12 and authorising the Directors to determine their remuneration will be tabled at the Annual General Meeting.

Post balance sheet events Post balance sheet events of the Company are given in note 27 to the financial statements on page 54. Statutory payments

All statutory payments due to the Government of Sri Lanka and on behalf of employees have been made or provided for as at the balance sheet date. DirectorsThe Directors listed on the inner back cover have been Directors of the Company as per the appended details.

Kotmale Holdings PLC (KHP) was a company within the Dunamis Capital PLC Group of Companies until Cargills (Ceylon) PLC acquired 73.4% of the shares of KHP on 3rd November 2010. The stake increased to 81.72% consequent to the Mandatory Offer which concluded on 30th December 2010. On 5th January 2011 the Board was reconstituted at a meeting of the Directors of KHP convened for the purpose, thus transferring effective Management control to the Cargills Group. Mr. M S J Fernando continues as the CEO of the Company.

Directors appointed Directors resigned 5th January 2011 5th January 2011

Mr. Stuart Young Mrs. Manjula MathewsMr. V R Page Mr. R SchaffterMr. M I Abdul Wahid Mr. D SchaffterMr. P S Mathavan Mr. N E Rodrigo Mr. A T P Edirisinghe Mr. A D E I PereraMr. Sunil Mendis

The shareholding in KHP was transferred to subsidiary company Cargills Quality Foods Limited on 31st March 2011 in order to consolidate all food manufacturing activities of the Cargills Group of Companies under Cargills Quality Foods Limited. Mr. J C Page, a Director of C T Holdings PLC (the ultimate holding company of KHP) was appointed to the Board w.e.f. 01st May 2011. Mr. Stuart Young, Mr. V R Page, Mr. M I Abdul Wahid, Mr. P S Mathavan, Mr. A T P Edirisinghe, Mr. Sunil Mendis and Mr. J C Page, Directors appointed during the year, retire in terms of the Company’s Articles of Association and being eligible offer, themselves for re-election.

Directors’ interests in contractsThe Directors’ interests in contracts and proposed contracts with the Company are included in note 24.3 to the financial statements on page 54. The Directors have declared their interests at meetings of the Board.

Annual Report of the Directors on the Affairs of the Company Contd.

31

Director’s shareholdings The Director’s shareholdings in the Compny were as follows:

As at As at 31st March 2011 31st March 2010

Mr. Stuart Young Appointed w.e.f. 05th January 2011 Nil N/A Mr. V R Page Appointed w.e.f. 05th January 2011 Nil N/A Mr. M I Abdul Wahid Appointed w.e.f. 05th January 2011 Nil N/A Mr. M S J Fernando Nil Nil Mr. P S Mathavan Appointed w.e.f. 05th January 2011 281,800 N/A Mr. A T P Edirisinghe Appointed w.e.f. 05th January 2011 Nil N/A Mr. Sunil Mendis Appointed w.e.f. 05th January 2011 Nil N/AMr. J C Page Appointed w.e.f. 01st May 2011 Nil N/AMrs. Manjula Mathews Resigned w.e.f. 05th January 2011 178,800 200,000Mr. D Schaffter Resigned w.e.f. 05th January 2011 N/A 862,988Mr. N E Rodrigo Resigned w.e.f. 05th January 2011 N/A NilMr. R Schaffter Appointed w.e.f. 05th August 2010 N/A N/A Resigned w.e.f. 05th January 2011 Mr. A D E I Perera Appointed w.e.f. 05th August 2010 N/A N/A Resigned w.e.f. 05th January 2011

Future developments The chairman’s statement describes the future developments of the Group. Environmental protection After making adequate enquiries from the management, the Directors are satisfied that the Company and its subsidiaries operate in a manner that minimizes the detrimental effect on the environment and provide products and services that have a beneficial effect on the customers and the communities within which the Group operates. Going concern The directors have adopted the ‘Going Concern’ basis in preparing these financial statements. After making enquiries from the management, the Directors are satisfied that the Group has adequate resources to continue its operations in the foreseeable future.

For and on behalf of the Board

(Signed)M S J Fernando(Executive Director / CEO)

(Signed)P S Mathavan(Executive Director)

(Signed)S L W Dissanayake(Company Secretary)

06th July 2011

32


The Companies Act No. 7 of 2007 places the responsibility on the Directors to prepare and present financial statements for each year comprising a balance sheet as at year-end date and statements of income, cash flows and changes in equity for the year, together with the accounting policies and explanatory notes. The responsibility of the auditor with regard to these financial statements, which differ from that of the Directors, is set out in the Auditor’s report (page 33).

Considering the present financial position of the Company and the forecasts for the next year, the Directors have adopted the going concern basis for the preparation of these financial statements.

The Directors confirm that the financial statements have been prepared and presented in accordance with the Sri Lanka Accounting Standards which have been consistently applied and supported, by reasonable and prudent judgments and estimates.

The Directors are responsible for ensuring that the Company maintains accounting records to be able to disclose with reasonable accuracy the financial position of the Company and the Group as well as for ensuring that the financial statements are prepared and presented

in accordance with the Sri Lanka Accounting Standards and provide the information required by the Companies Act.

The Directors are responsible for the proper management of the resources of the Company. The internal control system has been designed and implemented to obtain reasonable but not absolute assurance that the Company is protected from unduerisks, fraud and other irregularities. The Directors are satisfied that the control procedures operated effectively during the year.

The Directors, to the best of their knowledge and belief, are satisfied that all statutory payments have been made up to date or have been provided for in these financial statements.

By order of the Board

(Signed)S L W DissanayakeCompany Secretary

06th July 2011

Statement of Directors’ Responsibilities

33

Independent Auditors’ Report

TO THE SHAREHOLDERS OF KOTMALE HOLDINGS PLC.

Report on the Financial StatementsWe have audited the accompanying financial statements of Kotmale Holdings PLC (“Company”), the consolidated financial statements of the Company and its subsidiaries which comprise the balance sheets as at 31st March 2011, and the income statements, statements of changes in equity and cash flow statements for the year then ended, and a summary of significant accounting policies and other explanatory notes.

Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Sri Lanka Accounting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Scope of Audit and Basis of OpinionOur responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Sri Lanka Auditing Standards. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

We have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purposes of our audit. We therefore believe that our audit provides a reasonable basis for our opinion.

OpinionIn our opinion, so far as appears from our examination, the Company maintained proper accounting records for the year ended 31st March 2011 and the financial statements give a true and fair view of the Company’s state of affairs as at 31st March 2011 and its loss and cash flows for the year then ended in accordance with Sri Lanka Accounting Standards.

In our opinion, the consolidated financial statements give a true and fair view of the state of affairs as at 31st March, 2011 and the profit and cash flows for the year then ended, in accordance with Sri Lanka Accounting Standards, of the Company and its subsidiaries dealt with thereby, so far as concerns the shareholders of the Company.

Report on Other Legal and Regulatory RequirementsIn our opinion, these financial statements also comply with the requirements of Section 151 (2) and 153 (2) to 153 (7) of the Companies Act No. 07 of 2007.

NIHAL HETTIARACHCHI & CO.,Chartered Accountants.

COLOMBO06th July 2011


34

Group Company For the year ended 31st March 2011 2010 2011 2010 Notes Rs. Rs. Rs. Rs.

Revenue (03) 1,543,379,458 1,348,175,880 - -

Cost of sales (1,214,794,590) (1,059,270,478) - -

Gross profit 328,584,868 288,905,402 - -

Amortisation of grant 1,910,904 1,910,904 - -

Other income (04) 16,221,304 7,984,320 1,469,841 136,216,924

Distribution expenses (176,093,421) (130,749,669) - -

Administrative expenses (85,439,238) (65,449,387) (3,327,807) (1,242,893)

Impairment of goodwill - (5,368,501) - -

Other expenses (05) - - (70,605,622) -

Finance expenses (06) (8,114,228) (10,172,075) (289,413) (1,382,670)

Operating Profit / (loss) before tax (07) 77,070,189 87,060,994 (72,753,001) 133,591,361

Taxation (08) (1,787,496) (21,555,452) (23,351) (721,203) Net profit / (loss) 75,282,693 65,505,542 (72,776,352) 132,870,158

Earnings per share

Basic earnings / (losses) per share (09) 2.40 2.09 (2.32) 4.23

Dividend per share

Interim paid - 2.00 - 2.00

Final proposed - 2.00 - 2.00

The accounting policies and notes from pages 38 to 54 form an integral part of these financial statements.

Income Statement

35

Balance Sheet

Group Company As at 31st March 2011 2010 2011 2010 Notes Rs. Rs. Rs. Rs.

ASSETSNon-current assetsProperty, plant and equipment (10) 275,164,188 289,378,470 - -Work in progress 10,794,083 - - -Intangible assets (11) 55,863,274 55,863,274 - -Investments in subsidiaries (12) - - 185,400,000 215,400,060 341,821,545 345,241,744 185,400,000 215,400,060Current assetsInventories (13) 75,976,794 46,707,677 - -Trade and other receivables (14) 196,738,039 208,843,401 1,328,333 65,327,065Prepayments, deposits and advances (15) 20,585,265 36,890,879 - -Amounts due from related parties (16) 45,378,156 - 58,482,017 102,278,840Short term investments 28,502,151 30,381,922 - -Cash at banks and in hand 28,515,930 71,520,192 1,362,022 72,286 395,696,335 394,344,071 61,172,372 167,678,191Total assets 737,517,880 739,585,815 246,572,372 383,078,251EQUITY AND LIABILITIESCapital and reservesStated capital (17) 314,000,000 314,000,000 314,000,000 314,000,000Reserves (18) 232,642,044 220,159,351 (69,670,916) 65,905,436 546,642,044 534,159,351 244,329,084 379,905,436Non-current liabilitiesDeferred liability (19) 2,388,600 4,299,504 - -Deferred tax (20) 4,724,155 4,829,801 - -Interest bearing borrowings (21) 8,058,499 32,533,537 - -Retirement benefit obligations (22) 12,455,448 10,524,508 - - 27,626,702 52,187,350 - -Current liabilitiesTrade and other payables (23) 158,799,395 141,654,299 2,128,962 629,060Income tax payable 23,351 7,046,611 23,351 2,089,917Interest bearing borrowings (21) 4,192,818 3,928,877 - -Bank overdrafts 233,570 609,327 90,975 453,838 163,249,134 153,239,114 2,243,288 3,172,815Total liabilities 190,875,836 205,426,464 2,243,288 3,172,815Total equity and liabilities 737,517,880 739,585,815 246,572,372 383,078,251

Net assets per share 17.41 17.01 7.78 12.10

I certify that these financial statements have been prepared in compliance with the requirements of the CompaniesAct No.07 of 2007.

(Signed)Ruchira PereraHead of Finance

The Board of Directors is responsible for the preparation and presentation of these financial statements.Signed for and on behalf of the Board by,

(Signed) (Signed)M S J Fernando P S MathavanDirector / CEO Director

6th July 2011The accounting policies and notes from pages 38 to 54 form an integral part of these financial statements.


36

Statement of Changes in Equity

Group Stated Revaluation Other Retained Total capital reserve reserves earnings Rs. Rs. Rs. Rs. Rs.

Balance as at 1st April 2009 314,000,000 130,522,781 3,054,017 83,877,011 531,453,809

Profit for the year - - - 65,505,542 65,505,542

Dividends paid - - - (62,800,000) (62,800,000)

Balance as at 31st March 2010 314,000,000 130,522,781 3,054,017 86,582,553 534,159,351



Dividends paid - - - (62,800,000) (62,800,000)

Balance as at 31st March 2011 314,000,000 130,522,781 3,054,017 99,065,246 546,642,044

Company Stated General Capital Retained Total capital reserve reserves earnings Rs. Rs. Rs. Rs. Rs.

Balance as at 1st April 2009 314,000,000 1,269,472 1,784,545 (7,218,739) 309,835,278


Dividends paid (62,800,000) (62,800,000) Balance as at 31st March 2010 314,000,000 1,269,472 1,784,545 62,851,419 379,905,436


Profit for the year - - - (72,776,352) (72,776,352)

Dividends paid - - - (62,800,000) (62,800,000)

Balance as at 31st March 2011 314,000,000 1,269,472 1,784,545 (72,724,933) 244,329,084


37

Group Company For the year ended 31st March 2011 2010 2011 2010 Rs. Rs. Rs. Rs.

Cash flows from operating activitiesProfit / (loss) before tax 77,070,189 87,060,994 (72,753,001) 133,591,361Adjustments for :Amortisation of grant (1,910,904) (1,910,904) - -Impairment of goodwill - 5,368,501 - -Interest expenses (Note 6) 8,114,228 10,172,075 289,413 1,382,670Depreciation 28,868,978 28,342,700 - -Provision for gratuity 2,741,517 3,243,070 - -Impairment of property, plant and equipment 10,967,368 -Provision for investment write off - - 30,000,060 -Operating profit before working capital changes 125,851,376 132,276,436 (42,463,528) 134,974,031

(Increase) / Decrease in inventories (29,269,117) 4,357,079 - -(Increase) / Decrease in trade & other receivables 12,105,362 (36,284,058) 63,998,732 (64,637,732)(Increase) / Decrease in prepayments, deposits 16,305,614 7,307,256 - -(Increase) / Decrease in amounts due fromrelated parties (45,378,156) 100,482,232 43,796,823 15,549,007Increase / (Decrease) in trade & other payables 17,145,096 2,953,493 1,499,902 (785,440)Increase / (Decrease) in amounts due to related parties - (8,684,295) - -

Cash generated from operations 96,760,175 202,408,143 66,831,929 85,099,866

Interest paid (Note 6) (8,114,228) (10,172,075) (289,413) (1,382,670)Gratuity paid (810,577) (772,564) - -Tax paid (8,916,390) (29,911,464) (2,089,917) (2,890,195)Net cash generated from operating activities 78,918,980 161,552,040 64,452,599 80,827,001

Cash flows from investing activitiesPurchase of property, plant & equipment (25,622,076) (22,955,171) - -Effects on property, plant & equipment transfers - 100,124 - - Movement in work in progress (10,794,083) - - -Movement in investment 1,879,771 (30,381,922) - (60)Net cash used in investing activities (34,536,388) (53,236,969) - (60)

Cash flows from financing activitiesMovement in finance lease (3,928,877) (2,239,199) - -Dividend paid (62,800,000) (62,800,000) (62,800,000) (62,800,000)Movement in long term borrowings (20,282,220) 8,270,123 - -Net cash used in financing activities (87,011,097) (56,769,076) (62,800,000) (62,800,000)

Net increase / (decrease) in cash and cash equivalents (42,628,505) 51,545,995 1,652,599 18,026,941

Cash and cash equivalents at the beginning of the year 70,910,865 19,364,870 (381,552) (18,408,493)Cash and cash equivalents at the end of the year 28,282,360 70,910,865 1,271,047 (381,552)

Analysis of cash and cash equivalentsCash at banks 28,226,490 71,295,126 1,362,022 72,286Cash in hand 289,440 225,066 - -Bank overdrafts (233,570) (609,327) (90,975) (453,838)Cash and Cash Equivalents at the end of the year 28,282,360 70,910,865 1,271,047 (381,552)


Cash Flow Statement


38

1 CORPORATE INFORMATION 1.1 Domicile and Legal form Kotmale Holdings PLC., formerly known as Lambretta (Ceylon) Ltd., is a company incorporated and operating in Sri Lanka since 6th January, 1967 as a quoted Public Company listed on the Colombo Stock Exchange. The registered office of the company is located at No. 40, York Street, Colombo 10. 1.2 Principal Activities and Nature of OperationKotmale Holdings PLC became the holding company of the Group during the financial year ended 31st December, 2003. The principal activities of the subsidiaries are to engage in the manufacture of dairy products and the packeting and distribution of milk powder. 1.3 Ultimate Parent Entity The ultimate parent company of the Kotmale Holdings PLC has changed from Dunamis Capital PLC to C T Holdings PLC and the immediate parent company is Cargills Quality Foods Ltd.

Cargills (Ceylon) PLC acquired 23,046,538 shares of the company on 3rd November 2010. In addition further stake of 2,612,934 shares were acquired from the mandatory offer which was closed on 30th December 2010, increasing total holdings to 81.72%.

As at 31st March 2011, Cargills (Ceylon) PLC has transferred the ownership of Kotmale Holdings PLC to its wholly owned subsidiary, Cargills Quality Foods Ltd. 1.4 Date of Authorisation for Issue The financial statements of Kotmale Holdings PLC for the year ended 31st March 2011 were authorised for issue in accordance with a resolution of the Board of Directors on 6th July 2011.

1.5 Subsidiaries The directors of the following subsidiaries have changed the Company names from Swiss Cheese Company (Pvt) Ltd, to Kotmale Dairy Products (Pvt) Ltd, with effect from 4th August 2010, and Milife Foods Ltd., to Kotmale Milk Foods Ltd, with effect from 22nd July 2010 to associate the brand name of “KOTMALE” with the Company names.

Kotmale Products Ltd, and Kotmale Milk Foods Ltd, are fully owned subsidiaries of Kotmale Holdings PLC. the following companies which are fully owned subsidiaries of Kotmale Products Ltd., have also been included in the consolidated financial statements. - Kotmale Dairy Products (Pvt) Ltd. - Kotmale Milk Products Ltd. - Kotmale Kiri (Pvt) Ltd. - Kotmale Marketing (Pvt) Ltd. Kotmale Marketing (Pvt) Limited ceased operations on 31st March 2001 and is in the process of liquidation.Kotmale Kiri (Pvt) Limited ceased operations with effect from February 2007 and continues as a dormant Company. Kotmale Milk Foods Limited has ceased its commercial operations with effect from 01st February 2011.

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES2.1 General Policies2.1.1 Statement of compliance

The financial statements of Kotmale Holdings PLC., have been prepared in accordance with Sri Lanka Accounting Standards (SLAS) as laid down by the Institute of Chartered Accountants of Sri Lanka (ICASL) and the requirements of the Companies Act No.07 of 2007. 2.1.2 Basis of preparation

The balance sheet, income statement, statement of changes in equity and the cash flow statement, together with the accounting policies and notes (The “financial statements”) of the Group as at 31st March, 2011, and for the year then ended, comply with Sri Lanka Accounting Standards (SLAS).

The financial statements are presented in Sri Lankan rupees and have been prepared on a historical cost basis. Certain property, plant and equipment which have been revalued.

Notes to the Financial Statements

39

2.1.3 Comparative information

The accounting policies applied by the company and the Group are, unless otherwise stated, consistent with those used in the previous year. The previous year’s figures and phrases have been re-arranged, wherever necessary, to conform with the current year’s presentation.

2.1.4 Consolidation policy

a) Principles of consolidation The Group financial statement comprises a consolidation of the financial statements of the company and its subsidiaries in terms of Sri Lanka Accounting Standards No. - 26 “Consolidated financial statement” and “Accounting for investment in subsidiaries.’’ All the companies in the Group have a common financial period, which ends on 31 March of each year.

The financial statements of the Group represent the consolidation of the financial statements of the company and its subsidiaries after elimination of all material inter- group transactions.

Subsidiaries remain under the control of the parent company from the date such control is acquired until such time as control ceases. Acquisitions of subsidiaries are accounted for using the purchase method of accounting.

The total profits and losses for the period of the Company and of its subsidiaries included in the consolidation are shown in the consolidated income statement.

All assets and liabilities of the company and of its subsidiaries included in the consolidation are shown in the consolidated balance sheet. b) Goodwill Goodwill acquired in a business combination is initially measured at cost, being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is measured at cost less any accumulated

impairment losses. Goodwill is reviewed for impairment, annually or more frequently, if events or changes in circumstances indicate that the carrying value may be impaired.

For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to a group of cash-generating units which are expected to benefit from the synergies of the combination.

Impairment is determined by assessing the recoverable amount of the cash generating unit to which the goodwill relates. Where the recoverable amount of the cash generating unit is less than the carrying amount, an impairment loss is recognised. The impairment loss is first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets; pro-rata, to the carrying amount of each asset in the unit.

2.1.5 Foreign currency transactions

Transactions arising in foreign currencies are converted into Sri Lankan rupees at the rate of exchange prevailing at the time the transactions were effected. All monetary assets and liabilities in foreign currencies are converted into Sri Lankan rupees at the rate of exchange prevailing as at balance sheet date. The resulting gains or losses arising are dealt within the income statement.

2.1.6 Taxation

a) Current tax Provision for income tax is based on the elements of income and expenditure as reported in the financial statements and is computed in accordance with the provisions of the Inland Revenue Act No. 10 of 2006 and amendments thereto.

Kotmale Milk Products Ltd., a subsidiary company, is exempted from income tax for a period of 5 years commencing from the year of assessment 2002/03 under section 17 (2) of the BOI Law of Sri Lanka No. 04 of 1978. Accordingly, income of the company is taxable from the year of assessment 2007/2008. The provision for income tax is based on the elements of income and expenditure as reported in the financial statements and computed in accordance with the provisions of the Inland Revenue Act No. 10 of 2006 and subsequent


40

amendments thereto. However, Section 16 (1) (2) (a) of this Act exempts the profits and income of the Company for a period of 5 years commencing from the year of assessment 2006/2007.

The profits and income of Kotmale Kiri (Pvt) Ltd are exempt from tax for a period of 5 years commencing from the year of assessment 2006/2007 under section 16 (1) (2) (a) of the Inland Revenue Act No. 10 of 2006.

(b) Deferred taxation Deferred taxation is provided in full, using the liability method, on temporary differences arising between tax basis of assets and liabilities and their carrying amounts in the financial statements. However, deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit / (loss). Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which temporary differences can be utilised.

Deferred income tax is provided on temporary differences arising on investments in subsidiaries except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.

2.2 Valuation of Assets and Their Basis 0f Measurement 2.2.1 Property, plant and equipment

a) Cost and valuation All items of property, plant and equipment are initially recorded at cost. Where items of property, plant and equipment are subsequently revalued, the entire class of such assets is revalued. Revaluations are made with sufficient regularity to ensure that their carrying amounts do not differ materially from their fair values as at the

balance sheet date. Subsequent to the initial recognition as an asset at cost, property, plant and equipment, if revalued, are carried at revalued amounts less any subsequent depreciation thereon. Additions subsequent to the last revaluation are disclosed at cost. All other property, plant and equipment are stated at historical cost less depreciation.

When an asset is revalued, any increase in the carrying amount is credited directly to a revaluation surplus, unless it reverses a previous revaluation decrease relating to the same assets, which had previously been recognised as an expense. In these circumstances, the increase is recognised as income to the extent of the previous write-down. When an asset’s carrying amount decreases as a result of a revaluation, the decrease is recognised as an expense, unless it reverses a previous increment relating to that asset, in which case it is charged against any related revaluation surplus, to the extent that the decrease does not exceed the amount held in the revaluation surplus in respect of that same asset. Any balance remaining in the revaluation surplus in respect of assets, is transferred directly to retained profits on retirement or disposal of the assets.

(b) Restoration costs Expenditure incurred on repairs or maintenance of property, plant and equipment in order to restore or maintain the future economic benefits expected from the originally assessed standard of performance, is recognised as an expense when incurred.

(c) Depreciation Provision for depreciation is calculated by using a straight line method on the cost or valuation of all property, plant and equipment, in order to write off such amounts over the estimated useful economic lives of such assets.

Kotmale Holdings PLC., Kotmale Products Ltd., Kotmale Marketing (Pvt) Ltd., and Kotmale Kiri (Pvt) Ltd., do not own any property, plant and equipment as at 31st March 2011.

Kotmale Milk Products Ltd., Kotmale Dairy Product (Pvt) Ltd., and Kotmale Milk Foods Ltd., depreciate its property, plant and equipment as follows;

Notes to the Financial Statements Contd.

41

Assets YearsBuilding 20-40Premises - Mulleriyawa 20Cool room and cooling plant 10Cooling unit on lease lorry 8Plant, machinery and equipment 10Office furniture, fittings & equipment 4Motor vehicles 4

(d) Leased assetsWhere assets are financed by an agreement under which substantially all the risk and rewards of the ownership are transferred to the lessee, such assets are recorded in the balance sheet as property, plant and equipment at their individual cash price.

The total interest payable is accounted as interest in suspense, and the corresponding credit is recorded as an amount payable to the lessor, the installments paid are used to reduce this liability.

An amount equal to the interest charges for the year is transferred from the interest in suspense account to the income statement.

(e) Impairment of assets The Group assesses, at each reporting date, whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Group makes an estimate of the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash generating unit’s fair value less costs to sell, and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows which are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

Impairment losses are recognized in the income statement, except that impairment losses in respect of property, plant and equipment are recognised against the revaluation reserve to the extent that it reverses a previous revaluation surplus.

An assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. Previously recognised impairment losses other than in respect of goodwill, are reversed only if there has been an increase in the recoverable amount of the asset. Such increase is recognised to the extent of the carrying amount in case impairment losses not been recognised previously. 2.2.2 Intangible assets

Intangible assets are recognised if it is probable that future economic benefit will flow to the enterprise, and the cost of the assets can be measured reliably. 2.2.3 Investments

Investments in subsidiaries have been accounted for at cost, net of any impairment which is charged to the income statement. Kotmale Holdings PLC., acquired Kotmale Products Ltd., on 2 May, 2003, and Kotmale Milk Foods Ltd., on 30 November, 2005, as wholly owned subsidiaries.

Kotmale Dairy Products (Pvt) Ltd., Kotmale Kiri (Pvt) Ltd., Kotmale Milk Products Ltd., and Kotmale Marketing (Pvt) Ltd., are wholly owned subsidiaries of Kotmale Products Ltd.

2.2.4 Inventories

Inventories are valued at the lower of cost and estimated net realizable value. Net realizable value is the estimated selling price less estimated costs of completion and the estimated costs incidental to the sale.

Inventories are valued according to the basis given below.


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Finished goods are valued at direct cost.

Total direct cost includes: I. Basic cost - This includes the purchase cost of milk

and other raw materials II. Packing costIII. Flavour cost Chemicals, other raw materials and packing materials are valued at cost. 2.2.5 Trade and other receivables

Trade and other receivables are stated at the estimated to realisable value.

2.2.6 Cash and cash equivalents

Cash and cash equivalents comprise cash in hand, demand deposits in bank and short term highly liquid investments, readily convertible to known amounts of cash and subject to insignificant risk of changes in value.

For the purpose of the cash flow statement, cash and cash equivalents consist of cash in hand and deposits in bank, net of outstanding bank overdraft.

The cash flow statement is prepared based on the indirect method. 2.3 Liabilities and Provisions

2.3.1 Liabilities

Liabilities classified as current liabilities in the balance sheet are those obligations payable on demand or within one year from the balance sheet date. Liabilities classified as non current liabilities are those obligations that extend beyond a period of one year of the balance sheet date.

2.3.2 Provisions

Provisions are recognised when the company has a legal or constructive obligation, as a result of past events and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made.

2.3.3 Retirement benefit cost

(a) Defined benefit plan - Retirement gratuity Full provision has been made in the financial statements for retiring gratuities payable under the Payment of Gratuity Act No.12 of 1983 for all employees including those who have completed less than five years of continued service with the Group, and is recognised as an expense in the period during which their services are rendered. However, according to the Payment of Gratuity Act No. 12 of 1983; the liability for gratuity payment to an employee arises only on completion of 5 years of continued service with the company. This liability, which is classified as a non current liability, is not externally funded nor actuarially valued. This liability is grouped under non current liabilities in the balance sheet date based on the gratuity formula method in accordance with Sri Lanka Accounting Standard (SLAS). I. Discount rate 9%II. Salary increment rate 8% (b) Defined contribution plan - Employees Provident Fund and Employees Trust Fund. All employees who are eligible to receive Employees Provident Fund and Employees Trust Fund benefits are covered by contribution funds in line with statutes and regulations relevant to them.

The Company contributions to provident fund and trust fund covering the employees are recognised as expenses in the income statement in the period in which they are incurred. 2.3.4 Capital grants

Grants represent funds received in the form of plant. Grants are amortised on a straight line basis over the useful life of such assets. 2.4 Income Statement 2.4.1 Revenue recognition

Revenue is recognised to the extent that it is probable that the economic benefit will flow to the Group and the revenue can be reliably measured.


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(a) RevenueThe revenue of the Group represents the invoiced value of goods, net of discounts and returns. Inter-group sales are excluded in computing group revenue.

(b) DividendDividend income is recognised on the income statement, when the Company’s right to receive payment is established.

(c) Interest incomeInterest income is recognised on an accrual basis.

(d) Other incomeOther income is recognised on an accrual basis. 2.4.2 Expenditure recognition

Expenses are recognised in the income statement on the basis of a direct association between the cost incurred and the earning of specific items of income. All expenditure incurred in running the business and in maintaining capital assets in a state of efficiency has been charged to the income statement. For the purpose of the presentation of the income statement the “function of expenses” method has been adapted on the basis that it presents fairly the elements of the Company and Group’s performance.

2.5 Directors Responsibility StatementThe directors acknowledge the responsibility for a true and fair presentation of the financial statements in accordance with the accounting records and Sri Lanka Accounting Standards and the requirements of the Companies Act No. 7 of 2007.


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3 REVENUE


Liquid milk based products 1,585,988,012 1,170,915,483 - -Milk powder - 218,115,901 - - 1,585,988,012 1,389,031,384 - -Nation Building Tax (42,608,554) (40,855,504) - - 1,543,379,458 1,348,175,880 - -

4 OTHER INCOME


Dividends income - - - 133,093,650Interest income 2,876,479 7,815,578 101,127 3,123,274Over provision of bad debts - 4,046 - -Creditors written back 5,527,660 - - -Gain from changes in assumptions for gratuity 1,226,815 - - -Sundry income 5,221,636 164,696 - -Tax over provision written back 1,368,714 - 1,368,714 - 16,221,304 7,984,320 1,469,841 136,216,924

5 OTHER EXPENSES


Provision for investment in Kotmale Milk Foods Ltd. - - 30,000,060 -Provision for amount due fromrelated party - Kotmale Milk Foods Ltd. - - 40,605,562 - - - 70,605,622 -

6 FINANCE EXPENSES


Bank charges 3,371,047 2,752,198 103,749 105,633Exchange difference - (102,438) - -Gratuity interest 758,657 733,477 - -Import charges - 529,552 - -Interest on lease 203,534 688,178 - -Interest on distributors deposit - 91,467 - -Loan interest 2,659,057 2,490,927 - -Loss arising from changes in assumpti ons for gratuity 801,034 767,435 - -Other financial costs - 639,087 - -Overdraft interest 320,899 1,582,192 185,664 1,277,037 8,114,228 10,172,075 289,413 1,382,670

For the preparation of Cash Flow Statement the Company has considered total finance expenses as interest expenses.


45

7 OPERATING PROFITThe operating profit has been arrived at after charging / (crediting), all the expenses including the followings.


Amortisation of grant (1,910,904) (1,910,904) - -Auditor’s remuneration 616,142 720,933 236,500 199,500Defined contribution plan cost EPF/ ETF 11,596,219 9,656,844 - -Depreciation 28,868,977 28,342,700 - -Impairment of goodwill - 5,368,501 - -Retirement benefit plan cost - gratuity 2,244,472 1,130,388 - -Staff expenses 85,212,614 63,333,402 - -Penalty and surcharges 255,215 - - -Legal and professional fees 802,921 - - -Provision for bad debts 9,600,000 - - -Donations and subscriptions 660,746 - - -Impairment of assets 10,967,368 - - -

8 TAXATIONReconciliation of accounting profit to income tax expense on ordinary activities


Accounting profit / (loss) before tax 77,070,189 87,060,994 (72,753,001) 133,591,361Income not subject to tax (198,504,803) (84,059,333) -Aggregate disallowed expenses 134,530,224 38,829,499 70,605,622 92,079Aggregate allowed expenses (23,156,942) (18,229,401) (1,469,841) - (10,061,332) 23,601,759 (3,617,220) 133,683,440

Other income ( Excluding dividend income) 2,299,666 7,550,282 101,127 3,123,274Taxable profit (Excluding other income) - 23,601,759 - -Utilisation of tax losses (Note 8.1) (804,883) (8,151,634) (35,394) (1,093,146) 1,494,783 23,000,407 65,733 2,030,128

Current income tax expenses 523,174 5,407,544 23,006 710,545Under provision for previous year 1,362,120 310,173 - -Social responsibility levy 7,848 81,113 345 10,658 Deferred tax (105,646) (857,462) - -10% Withholding tax on inter-company dividends - 16,614,084 - -Total tax liability 1,787,496 21,555,452 23,351 721,203


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8.1 Tax Losses Carried Forward


Tax losses brought forward 125,265,312 133,416,946 18,306,676 16,866,338Tax losses arising during the year - - - 2,533,484Utilisation of tax losses (804,883) (8,151,634) (35,394) (1,093,146) 124,460,429 125,265,312 18,271,282 18,306,676

9 BASIC EARNINGS PER SHAREBasic earnings per share is calculated by dividing the net profit for the year attributable to ordinary shareholders of the company by weighted average number of ordinary shares in issue during the year.


Amount used as the numeratorProfit / (Loss) attributable to ordinary shareholders 75,282,693 65,505,542 (72,776,352) 132,870,158

Amount used as denominatorWeighted average number of ordinary shares 31,400,000 31,400,000 31,400,000 31,400,000

10 PROPERTY, PLANT AND EQUIPMENT


Freehold property, plant & equipment (Note 10.1) 275,164,188 267,861,169 - -

Leasehold property, plant & equipment (Note 10.2) - 21,517,301 - 275,164,188 289,378,470 - -

Property, plant and equipment of the subsidiary Companies, Kotmale Milk Foods Ltd., Kotmale Dairy Products (Pvt) Ltd.,and Kotmale Milk Products Ltd.,were revalued by an independent professional valuer, Mr.G.Henry J.Perera in March 2009and the values were incorporated as at 31st March 2009.

Kotmale Dairy Products (Pvt) Ltd, has Rs. 69 Mn worth of lands (1.7 acres ) and buildings (29,615 sq.ft.) in Mulleriyawa and Rs. 12 Mn worth of land (1.7 acres) and buildings (17,442 sq.ft.) in Bogahawatha.


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10.1. Freehold Property, Plant and Equipment

Group Land and Plant Motor Furniture Computer Total buildings & equipment vehicles & fittings equipment Rs. Rs. Rs. Rs. Rs.

COST / REVALUATIONBalance as at 01st April 2010 103,461,472 274,196,121 11,256,695 6,475,248 4,831,409 400,220,945Additions - 20,590,795 3,800,000 330,131 901,150 25,622,076Transfers - 36,267,553 4,258,369 - - 40,525,922Impairment - (23,089,197) - - - (23,089,197)Adjustment (6,961,472) (80,792,790) - (14,595) - (87,768,857)Balance as at 31st March 2011 96,500,000 227,172,482 19,315,064 6,790,784 5,732,559 355,510,889

DEPRECIATIONBalance as at 01st April 2010 9,211,472 105,691,422 10,363,424 4,766,645 2,326,817 132,359,780Charge for the year 2,250,000 23,727,211 999,191 1,014,052 878,523 28,868,977Transfers - 15,170,706 3,837,915 - - 19,008,621Impairment - (12,121,829) - - - (12,121,829)Adjustment (6,961,472) (80,792,792) - (14,584) - (87,768,848)Balance as at 31st March 2011 4,500,000 51,674,718 15,200,530 5,766,113 3,205,340 80,346,701

WRITTEN DOWN VALUEBalance as at 31st March 2011 92,000,000 175,497,764 4,114,534 1,024,671 2,527,219 275,164,188

Balance as at 31st March 2010 94,250,000 168,504,699 893,274 1,708,603 2,504,593 267,861,169

NoteThe machinery on agreement with Tetra Pak Singapore and Emerging markets, a division of Tetra Pak South Asia (Pvt) Ltd., has been impaired. As a result, impairment loss of Rs. 10,967,368 has been charged to the Financial Statement of Kotmale Milk Products Ltd.

10.2. Leasehold Property, Plant and Equipment

Group Plant & Motor Total equipment vehicles Rs. Rs. Rs.

COST / REVALUATIONBalance as at 01st April 2010 36,267,553 4,258,369 40,525,922Transfers (36,267,553) (4,258,369) (40,525,922)Balance as at 31st March 2011 - - -

DEPRECIATIONBalance as at 01st April 2010 15,170,706 3,837,915 19,008,621Transfers (15,170,706) (3,837,915) (19,008,621)Balance as at 31st March 2011 - - -

WRITTEN DOWN VALUEBalance as at 31st March 2011 - - -

Balance as at 31st March 2010 21,096,847 420,454 21,517,301


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11 INTANGIBLE ASSETS

Group Company As at 31st March 2011 2010 2011 2010 Rs. Rs. Rs. Rs.

CostAt the beginning of the year 97,773,232 97,773,232 - -

Accumulated amortisation / impairmentAt the beginning of the year (41,909,958) (36,541,457) - -Impairment - (5,368,501) - -At the end of the year (41,909,958) (41,909,958) - -Net carrying value 55,863,274 55,863,274 - -

As from 01st January 2006, goodwill is no longer amortised but tested for impairment annually. Goodwill acquiredthrough business combinations have been allocated to two cash generating units for impairment testing.

12 INVESTMENTS IN SUBSIDIARIES

Company As at 31st March Holding No. of 2011 2010 (%) shares Rs. Rs.

Kotmale Products Ltd. 100 10,372,560 185,400,000 185,400,000Kotmale Milk Foods Ltd. 100 70 30,000,060 30,000,060Provision for the investement in Kotmale Milk Foods Ltd. (30,000,060) - 185,400,000 215,400,060

Kotmale Milk Foods Ltd. has not re-commenced its operation during the past 13 months, therefore, the Board ofDirectors of the Company has decided to make a full provision for the above investment.

13 INVENTORIES


Finished goods 33,400,599 13,893,133 - -Raw materials 14,906,486 12,541,782 - -Packing materials 24,084,924 12,078,821 - -Others 8,266,086 8,193,941 - -Less: Provision for obsolete stocks (4,681,301) - - - 75,976,794 46,707,677 - -


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14 TRADE AND OTHER RECEIVABLES


Trade debtors 175,622,433 194,016,992 - -Staff debtors (Note 14.1) 703,113 646,992 - -Other receivables (Note 14.2) 20,412,493 14,179,417 1,328,333 65,327,065 196,738,039 208,843,401 1,328,333 65,327,065

14.1 Staff DebtorsBalance at the beginning of the year 646,992 416,928 - -Festival advance 1,950,442 1,510,564 - -Repayment during the year (1,894,321) (1,280,500) - -Balance at the end of the year 703,113 646,992 - -

14.2 Other ReceivablesAdvance to farmers 12,584,626 8,966,331 - -Dividend receivable - - - 63,998,732Other debtors 7,827,867 5,213,086 1,328,333 1,328,333 20,412,493 14,179,417 1,328,333 65,327,065

15 PREPAYMENTS, DEPOSITS & ADVANCES


Advances 8,200,660 12,901,686 - -Deposits 1,041,000 1,503,074 - -ESC prepayment 9,897,974 20,512,443 - -NBT recoverable - 426,852 - -NSL recoverable - 3,757 - -Other prepayments 1,445,631 1,338,142 - -Withholding tax - 204,925 - - 20,585,265 36,890,879 - -

16 AMOUNTS DUE FROM RELATED PARTIES


Kotmale Kiri (Pvt) Ltd. - - - 2,448,176Cargills (Ceylon) PLC 45,378,156 - - -Kotmale Milk Products Ltd. - - 18,438,381 18,438,381Kotmale Milk Foods Ltd. - - 40,605,562 40,605,562Provision for amounts due from related party - Kotmale Milk Foods Ltd. - - (40,605,562) -Kotmale Dairy Products (Pvt) Ltd. - - 40,043,636 40,786,721 45,378,156 - 58,482,017 102,278,840


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17 STATED CAPITAL


31,400,000 ordinary shares 314,000,000 314,000,000 314,000,000 314,000,000

18 RESERVES


Capital reserves 1,784,545 1,784,545 1,784,545 1,784,545General reserves 1,269,472 1,269,472 1,269,472 1,269,472Retained earnings 99,065,246 86,582,553 (72,724,933) 62,851,419Revaluation reserves 130,522,781 130,522,781 - - 232,642,044 220,159,351 (69,670,916) 65,905,436

19 DEFERRED LIABILITYGrant received for the Tetra Pak filling machine


Balance at the beginning of the year 4,299,504 6,210,408 - -Amortisation for the year (1,910,904) (1,910,904) - -Balance at the end of the year 2,388,600 4,299,504 - -

20 DEFERRED TAX


Balance at the beginning of the year 4,829,801 5,687,263 - -Deferred tax (reversal) / expenses (105,646) (857,462) - - 4,724,155 4,829,801 - -


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21 INTEREST BEARING BORROWINGS


Non CurrentLankaputhra Development Bank 3,918,546 8,396,947 - -People’s Leasing 4,139,953 7,641,563 - -Tetra Pak machinery loan - 16,495,027 - - 8,058,499 32,533,537 - -

CurrentLankaputhra Development Bank 2,239,200 - - -People’s Leasing 1,953,618 - - -Lease creditors - 3,928,877 - - 4,192,818 3,928,877 - -

21.1 Details of The Borrowings at 31st March 2011 are Set Out Below

Institution & Facility PrincipalAmount

Rs.

Balance Amount

Rs.

Repayment term & interest rate

Kotmale Holdings PLCBank OverdraftDFCC Vardana Bank PLC 25,000,000 3,529 Average interest rate of 15%

Kotmale Dairy Products (Pvt) LtdBank OverdraftBank of Ceylon 10,000,000 - Average interest rate of 12.75%

Letter of CreditBank of Ceylon 40,000,000 - N/A

Import LoanBank of Ceylon 40,000,000 -

Repayable on maturity at average interest rate of 11.75%

Long term loansPeople’s Leasing Co.

People’s Leasing Co.

Lankaputhra Development Bank

3,549,000

4,500,000

11,196,000

2,258,876

3,834,695

6,157,746

48 monthly installments of Rs. 73,940 per month, commencing from September 2009 at average interest rate of 6.5% for the year

48 monthly installments of Rs. 93,750 per month, commencing from August 2010, at average interest rate of 6.5% for the year

60 monthly installment of Rs. 186,599 per month, commencing from March 2009, at average interest rate of 14% for the year

Kotmale Milk Products LtdBank OverdraftPan Asia Banking Corporation PLC 5,000,000 - Average interest rate of 16%

Short-term LoanPan Asia Banking Corporation PLC 20,000,000 - Average interest rate of 16.50%


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21.2 Assets PledgeThe following assets have been pledged as securities for liabilities.

Group mortgage value : Rs. 50,000,000Lender : Bank of CeylonFacility : Series of loan & overdraft facilitySecurity : Mortgage over Stocks & Book Debtors of Kotmale Dairy Products (Pvt) Ltd.

22 RETIREMENT BENEFIT OBLIGATIONS


Balance at the beginning of the year 10,524,508 8,054,002 - -(Gain) / loss arising from change in assumptions (425,781) 640,209 - -Interest charge on gratuity 882,845 1,387,982 - -Payments made during the year (810,577) (772,564) - -Provision for the year 2,284,453 1,214,879 - -Balance at the end of the year 12,455,448 10,524,508 - -

23 TRADE AND OTHER PAYABLES


Accrued expenses 39,295,977 29,518,591 2,128,902 629,000GST & VAT payable 3,972,246 20,453,411 - -NBT payable 6,452,538 9,168,202 - -Sundry creditors 34,203,321 25,630,064 60 60Trade creditors 74,875,313 56,884,031 - - 158,799,395 141,654,299 2,128,962 629,060

24 DIRECTORS’ INTEREST IN CONTRACTS & RELATED PARTY TRANSACTIONS24.1 Details of Directorates are as Follows :

Mrs. Manjula Mr. Dinesh Mr. Jude Mr. N E Mr. Ramesh Mr. A D E I Mathews Schaffter Fernando Rodrigo Schaffter Perera

Group CompaniesKotmale Products Ltd. Kotmale Marketing (Pvt) Ltd. Kotmale Dairy Products (Pvt) Ltd. Kotmale Milk Products Ltd. Kotmale Kiri (Pvt) Ltd. Kotmale Milk Foods Ltd. Kotmale Holdings PLC

Other CompaniesMahaweli Foods Mills (Pvt) Ltd. Janashakthi Insurance Company PLC Kelsey Aluminum (Pvt) Ltd. First Capital Treasuries Ltd.


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With effect from 05th January 2011, the following directors (excluding Mr. Jude Fernando) were appointed as the new Board of Directors ;

Mr. Stuart Mr. V R Mr. M I Abdul Mr. Jude Mr. P S Mr. A T P Mr. Sunil *Mr. J C Young Page Wahid Fernando Mathavan Edirisinghe Mendis Page

Group CompaniesKotmale Products Ltd. Kotmale Marketing (Pvt) Ltd. Kotmale Dairy Products (Pvt) Ltd. Kotmale Milk Products Ltd. Kotmale Kiri (Pvt) Ltd. Kotmale Milk Foods Ltd. Kotmale Holdings PLC

Other CompaniesCargills (Ceylon) PLC Cargills Quality Foods Ltd. CT Holdings PLC

*with effect from 01st May 2011.

24.2 Related Party Transactions

Related Party Nature of the transaction Amount Rs.

Kotmale Dairy Products (Pvt) Ltd.Kotmale Holdings PLC Fund transfers 2,386,286 Payments to suppliers 3,129,371

Kotmale Milk Foods Ltd. Fund transfers 95,000 Payments to suppliers 37,305,401

Kotmale Milk Products Ltd. Fund transfers 15,023,000 Payments to suppliers 299,537,908 Finished goods transfers 511,033,053 Raw milk transfers 203,202,247

Kotmale Products Ltd. Fund transfers 1,300,000 Payments to suppliers 2,132,141

Cargills (Ceylon) PLC General sales 50,498,564

Kotmale Milk Products Ltd.Kotmale Milk Foods Ltd. Payments to suppliers 9,160,851


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24.3 Directors’ Interest in Contracts as follows ;

Name of the Company Name of the Director Nature of transaction

Mahaweli Foods Mills (Pvt) Ltd. Mrs. Manjula Mathews Cattle feed purchases amounting to Rs. 39,875,801 (Recovery made against farmers remittances)

First Capital Treasuries Ltd. Mrs. Manjula Mathews Investment of Rs. 60,361,524 Mr. Jude Fernando Mr. Dinesh Schaffter Mr. Eardley Perera

Janashakthi Insurance Company PLC Mrs. Manjula Mathews Insurance policies value of Rs. 2,697,621

Cargills (Ceylon) PLC Mr. V R Page Sales amounting to Rs. 50,498,564 Mr. M I Abdul Wahid Mr. P S Mathavan Mr. A T P Edirisinghe Mr. Sunil Mendis Mr. J C Page

25 CONTINGENT LIABILITIES

The Company has given corporate guarantees on behalf of its subsidiaries as follows :

Kotmale Dairy Products (Pvt) Ltd.

Loan Amount : Rs. 3,548,500Lender : People’s Leasing Company Ltd.

Loan Amount : Rs. 30,000,000Lender : Lanka Puthra Development Bank

Leasing facility : Rs. 4,500,000Lender : Peoples Leasing Company Ltd.

Overdraft : Rs. 10,000,000Series of loans on import : Rs. 40,000,000Letter of credit : Rs. 40,000,000Lender : Bank of Ceylon

Kotmale Milk Products Ltd.

Guarantee Value : Rs. 15,000,000Lender : Commercial Bank of Ceylon PLC

Loan Amount : Rs. 25,000,000Lender : Pan Asia Banking Corporation PLC

26 CAPITAL COMMITMENTSThere were no material capital commitments as at the balance sheet date.

27 POST BALANCE SHEET EVENTSThere were no other material events subsequent to the balance sheet date which require adjustments, or disclosures in the financial statements.


55

2006 2007/08 2008/09 2009/10 2010/11 Rs. 000’s Rs. 000’s Rs. 000’s Rs. 000’s Rs. 000’s (15 Months)

Financial ResultsRevenue 1,519,802 1,570,283 1,352,959 1,348,176 1,543,379Profit From Operating Activities 50,471 42,707 99,239 97,233 85,184Net Finance Cost (19,973) (31,552) (23,682) (10,172) (8,114)

Profit Before Taxation 30,497 11,155 75,557 87,061 77,070Income Tax Expenses (14,246) (6,225) (12,035) (4,941) (1,787)10% WHT on Inter-company Dividends - - - (16,614) -

Profit After Taxation 16,251 16,251 4,930 63,522 75,283

Financial PositionShare Capital 314,000 314,000 314,000 314,000 314,000Reserves 35,767 44,406 217,454 220,159 232,642Capital & Reserve 349,767 358,406 531,454 534,159 546,642

Current Assets 375,832 319,278 407,266 394,344 395,696Current Liabilities (297,530) (194,281) (183,666) (153,239) (163,249)Working Capital 78,302 124,997 223,600 241,105 232,447

Property, Plant and Equipment 230,529 210,079 294,866 289,378 285,958Intangible Assets / Biological Assets 78,908 68,421 61,232 55,863 55,863Non Current Liabilities (37,971) (45,092) (48,244) (52,187) (27,627)

Net Assets 349,767 358,406 531,454 534,159 546,642

Key IndicatorsEarnings Per Share (Rs.) 0.52 0.16 2.02 2.09 2.40Dividend Per Share (Rs.) - - - 4.00 -Dividend Payout (times) - - - 0.52 -Market Value Per Share ( Closing, Rs.) 12.25 10.25 9.50 24.75 53.00Debt Equity Ratio (times) 0.11 0.13 0.09 0.10 0.05Interest Cover (times) 2.53 1.35 4.19 9.56 10.50Quick Assets Ratio (times) 1.15 1.22 1.94 2.27 1.96

Five Year Financial Summary


56

1. General Stated Capital - Rs. 314,000,000 Issued Shares - 31,400,000 Class of Shares - Ordinary Shares Voting Rights - One Vote per Ordinary Share

2. Stock Exchange ListingThe issued ordinary shares of Kotmale Holdings PLC are listed on the Colombo Stock Exchange.

3. Distribution of Shareholding

As at 31st March 2011 2010

No. of shares heldShareholders Holding Shareholders Holding

Number % Number % Number % Number %

1 - 1,000 1,302 70.49 472,250 1.50 1,009 71.30 325,387 1.03

1,001 - 10,000 449 24.31 1,519,701 4.84 310 21.91 1,227,089 3.91

10,001 - 100,000 88 4.76 2,501,800 7.97 83 5.87 2,382,943 7.59

100,001 - 1,000,000 7 0.38 1,246,777 3.97 8 0.57 2,605,705 8.30

Over 1,000,000 1 0.05 25,659,472 81.72 5 0.35 24,857,876 79.17

Total 1,847 100.00 31,400,000 100.00 1,415 100.00 31,400,000 100.00

4. Analysis of Shareholders

As at 31st March 2011 2010

Category of shareholders

Shareholders Holding Shareholders Holding

Number % Number % Number % Number %

Individuals 1,778 96.26 4,569,612 14.55 1,352 95.55 6,187,586 19.71

Institutions 69 3.74 26,830,388 85.45 63 4.45 25,212,414 80.29

Total 1,847 100.00 31,400,000 100.00 1,415 100.00 31,400,000 100.00

Resident 1,826 98.86 31,177,590 99.29 1,399 98.87 30,028,820 95.63

Non-Resident 21 1.14 222,410 0.71 16 1.13 1,371,180 4.37

Total 1,847 100.00 31,400,000 100.00 1,415 100.00 31,400,000 100.00

5. Public HoldingAs at 31st March 2011 2010

Number of shares held by the public 5,458,728 6,021,636Percentage held by the public - % 17.38 19.18

6. Share Price Movements For the year ended 31st March 2011 2010 Rs. Rs.

Highest 80.00 (12.01.2011) 25.00 (31.03.2010)Lowest 20.50 (10.08.2010) 9.25 (03.04.2009)Period-end 53.00 (31.03.2011) 24.75 (31.03.2010)

Investor Relations Supplement

57

7. Information on Share Trading and Market Capitalization 2010/11 2009/10

Number of transactions 13,928 9,706Number of shares traded 55,582,538 32,692,600Value of shares traded (Rs.) 2,102,135,380 610,663,975Market capitalization (Rs.) 1,664,200,000 777,150,000

8. Top Twenty Shareholders

Names of Shareholders No. of Shares Holdings No. of Shares Holdings as at % as at % 31st March 2011 31st March 2010

Cargills Quality Foods Ltd. 25,659,472 81.72 - -Mr. P S Mathavan 281,800 0.90 - -Janashakthi Insurance PLC 267,500 0.85 - -Mrs. M Mathews 178,800 0.57 200,000 0.64Mouldex Ltd. 158,000 0.50 158,000 0.50Mrs. D F E S Ollegasegrem 140,000 0.45 140,000 0.45Mr. J A S Priyantha 125,000 0.40 - -Merchant Credit of Sri Lanka Ltd. 104,200 0.33 - -The Bishop of Galle 100,000 0.32 - -Mr. S V Kodikara 100,000 0.32 - -Mr. P K D G Jayananda 100,000 0.32 - -Mr. R Somachandra & Mrs. D N D Jayathilaka (Joint) 99,000 0.32 - -Thurston Investments Ltd. 98,800 0.31 - -Mr. A L N Dunusinghe 72,000 0.23 - -Mr. A N C A Nuwarapaksa 68,400 0.22 - -Mr. H Y M Basheer 61,700 0.20Mr. G G R Kariyawasam 59,700 0.19 59,700 0.19First Capital Markets Ltd. /Mr. G Mahinthan 50,100 0.16 - -Mr. A P Rupasiri 50,000 0.16 - -Bartleet Finance Ltd. / Hans Anton Van Starrex 50,000 0.16 - -Dunamis Capital PLC - - 9,877,038 31.46First Capital Treasuries Ltd. - - 9,400,000 29.94Mr. Ramesh Schaffter - - 2,378,738 7.58Merchant Bank of Sri Lanka Ltd. / Mr. R Schaffter - - 1,959,600 6.24HSBC International Nominees Ltd-SSBT-Deutsche Bank AG Singapore - - 1,243,500 3.96Waldock Mackenzie Ltd. / Mr. D Schaffter - - 862,938 2.75Lanka Orix Finance Company Ltd. / Mr. R Schaffter - - 700,000 2.23Seylan Bank Ltd. / Mr. Jayantha Dewage - - 300,000 0.96Bank of Ceylon - No 2 - - 140,000 0.45Macksons Holdings (Pvt) Ltd. - - 120,400 0.38Mr. G Mahinthan - - 100,000 0.32Mr. Fuad - - 80,700 0.26Credit Suisse Singapore - - 67,000 0.21Mrs. I S Jayasinghe - - 57,500 0.18Mr. P S R Casie Chitty - - 57,400 0.18Mr. M M Mohamed Makeen - - 55,400 0.18


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Notice of Annual General Meeting

Notice is hereby given that the forty fourth Annual General Meeting of the Company will be held at the auditorium of the Institute of Chartered Accountants of Sri Lanka, No. 30A, Malalasekera Mawatha, Colombo 07 on Friday, 30th September 2011, at 3.00 p.m. and the business to be brought before the meeting will be:

1 To consider and adopt the Annual Report of the Board and the Statements of Accounts for the year ended 31st March 2011, with the Report of the Auditor thereon

2. To re-elect Directors a) Stuart Young b) V R Page c) M I Abdul Wahid d) P S Mathavan e) A T P Edirisinghe f) Sunil Mendis, and g) J C Page who retire, having been appointed by the Board since the last Annual General Meeting

3. To authorise the Directors to determine contributions to charities for the financial year as 2011 / 12

4. To appoint Messrs. KPMG Ford, Rhodes, Thornton & Co., Chartered Accountants, as auditors to the Company for the year 2011 /12 and to authorize the Directors to determine their remuneration.

By Order of the BoardKotmale Holdings PLC

(Signed)S L W DissanayakeCompany Secretary30th August 2011

Notes:i. A member is entitled to appoint a proxy to attend and vote at the meeting in his or her stead and the proxy need

not be a member of the Company.ii. A form of proxy is enclosed for this purpose.iii. The instrument appointing a proxy must be completed and deposited at the registered office of the Company

not less than 48 hours before the time fixed for the meeting.

59

For use at the forty fourth Annual General Meeting

(Before completing this form please see notes on the reverse hereof)

I / We ..........................................................................................……………......................................................………………

of ……………………………………....................….........................………………………...........................................................

being a member / members of Kotmale Holdings PLC hereby appoint

…..................................................................…..………………......................….......………….……........….................…………

of ….........................….......……….………..........…....…………..………….……........….................…………or failing him / her,

the chairman of the meeting as my / our proxy to represent me / us and to speak and to vote for on my / our behalf at the sixty fourth Annual General Meeting of the Company to be held on Friday, 30th September 2011 at the auditorium of the Institute of Chartered Accountants of Sri Lanka, No. 30A, Malalasekera Mawatha, Colombo 07, and at any adjournment thereof and at every poll which may be taken in consequence thereof in the manner indicated below:

(Please indicate how you wish your votes to be cast by placing an ‘X’ in the spaces provided below. The resolutions are as indicated in the notice of the meeting in the annual report. Except as indicated by you, the proxy will exercise his / her discretion both as to voting and whether or not to abstain from voting on all resolutions at the meeting)

Ordinary Resolution Number

1 2(a) 2(b) 2(c) 2(d) 2(e) 2(f) 2(g) 3 4

For

Against

.............................................. .............................................. Date Signature

............................................................ Shareholder’s NIC / PP/ Co.Reg. No.

Proxy Form


60

INSTRUCTIONS FOR COMPLETION OF THE PROXY FORM

1. To be valid, the completed Form of Proxy should be deposited at the Registered Office of the Company at No: 40, York Street, Colombo 1, not less than 48 hours before the time appointed for the holding of the Meeting.

2. In perfecting the form, please ensure that all details are legible. If you wish to appoint a person other than the Chairman as your proxy, please fill in your full name and address, the name and address of the proxy holder and sign in the space provided and fill in the date of signature.

3. The instrument appointing a Proxy shall, in the case of an individual, be signed by the appointer or by his Attorney and in the case of a Corporation must be executed under its Common Seal or in such other manner prescribed by its Articles of Association or other constitutional documents.

4. If the Proxy Form is signed by an Attorney, the relevant Power of Attorney or a notarially certified copy thereof, should also accompany the completed Form of Proxy, if it has not already been registered with the Company.

5. In the case of joint holders, only one need sign. The votes of the senior holder who tenders a vote will alone be counted.

6. In the case of non-resident Shareholders, the stamping will be attended to upon return of the completed form of proxy to Sri Lanka.

Proxy Form Contd.

Name of the CompanyKotmale Holdings PLC

Company Registration No. PQ 213

Legal Form Incorporated as a public Company in 1967 under the provisions of the companies ordinance No. 51of 1938 and subsequently re-registered under the Companies Act No. 7 of 2007 on 6th May 2008

Stock Exchange Listing In 1969 the Company was Listed on the Colombo Stock Exchange

Board of Directors Stuart Young (Chairman) - Appointed w.e.f. 05 January 2011

V R Page (Deputy Chairman) - Appointed w.e.f. 05 January 2011

M I Abdul Wahid (Managing Director) - Appointed w.e.f. 05 January 2011

M S J Fernando (Chief Executive Officer)P S Mathavan - Appointed w.e.f. 05 January 2011

A T P Edirisinghe - Appointed w.e.f. 05 January 2011

Sunil Mendis - Appointed w.e.f. 05 January 2011

J C Page - Appointed w.e.f. 01 May 2011

Mrs. Manjula Mathews - Resigned w.e.f. 05 January 2011

D Schaffter - Resigned w.e.f. 05 January 2011

N E Rodrigo - Resigned w.e.f. 05 January 2011

R Schaffter - Appointed w.e.f. 05 August 2010 / Resigned w.e.f. 05 January 2011

A D E I Perera - Appointed w.e.f. 05 August 2010 / Resigned w.e.f. 05 January 2011

Subsidiaries Kotmale Dairy Products (Pvt) LtdKotmale Milk Foods Ltd.Kotmale Milk Products Ltd.Kotmale Products Ltd.Kotmale Marketing (Pvt) Ltd.Kotmale Kiri (Pvt) Ltd.

Registered Office No 40, York Street, Colombo 1.Tel: 2427500

Factory No.20, Sri Sumana Mawatha, New Town, Mulleriyawa.Tel: 2578774 – 6

Company Secretary S L W Dissanayake

RegistrarsSSP Corporate Services (Pvt) LtdNo 101, Inner Flower Road, Colombo 03.Tel: 2573894

Corporate Information

Auditors M/s Nihal Hettiarahchi & CoChartered Accountants622B, Kotte Road, Kotte.

Bankers Bank of CeylonDFCC Vardhana BankHatton National Bank PLCThe Hongkong & Shanghai Banking CorporationPan Asia Banking CorporationSeylan Bank PLCCommercial Bank PLC.

Remuneration CommitteeMr. Sunil Mendis (Chairman)Mr. A T P Edirisinghe

Audit CommitteeMr. A T P Edirisinghe (Chairman)Mr. Sunil Mendis

Produced by Copyline (Pvt) Ltd Printed by Printel (Pvt) Ltd

Kotmale Holdings PLCA Member of C T Holdings Group

Annual Report 2010/2011

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