2 Annual Report Notice of Meeting. Lankem Developments PLC. and

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3 Contents Notice of Meeting 02 Chairman s Review 04 Board of Directors 05 Annual Report of the Board of Directors 07 Corporate Governance 10 Risk Management Review 12 Audit Committee Report 13 Independent Auditors Report 15 Income Statement 16 Balance Sheet 17 Statement of Changes in Equity 18 Cash Flow Statement Share Information 57 Financial Summary 58 Corporate Information Inner Back Cover

4 2 Annual Report 2012 Notice of Meeting Notice is hereby given that the Thirty-Seventh Annual General Meeting of will be held at the Grand Oriental Hotel, No. 2, York Street, Colombo 01, on 28th June 2012, at a.m. for the following purposes, namely: 1. To receive and consider the Annual Report of the Board of Directors and the Statement of Accounts for the year ended 31st March 2012, with the Report of the Auditors thereon. 2. To re-elect as a Director, Mr. Anushman Rajaratnam who retires in accordance with Articles 84 and 85 of the Articles of Association. 3. To re-elect as a Director, Mr. A. R. Peiris who retires in accordance with Articles 84 and 85 of the Articles of Association. 4. To reappoint Mr. R. N. Bopearatchy who is over seventy years of age as a Director. A Special Notice has been received from a shareholder of the intention to pass a Resolution which is set out in the notes in relation to his reappointment (See Note No. 4 on page 3). 6. To reappoint Mr. A. Rajaratnam who is seventy years of age as a Director. A Special Notice has been received from a shareholder of the intention to pass a Resolution which is set out in the notes in relation to his reappointment. (See Note No. 5 on page 3). 7. To reappoint Mr. N. H. B. S. Perera who is over seventy years of age as a Director. A Special Notice has been received from a shareholder of the intention to pass a Resolution which is set out in the notes in relation to his reappointment. (See Note No. 6 on page 3). 8. To reappoint as Auditors, Messrs KPMG, and to authorise the Directors to determine their remuneration. 9. Special Business To consider and if thought fit to pass the following Special Resolution to amend the Articles of Association of the Company in the manner following: and That the existing Article 149 of the Articles of Association be deleted. and That the words with reference to an address in Sri Lanka appearing in line two of the existing Article 150 be deleted and the words an address outside Sri Lanka be substituted therefor and the said Article 150 of the Articles of Association be amended to read as follows : 150. If a Member has no registered address in Sri Lanka, and has not supplied to the Company an address outside Sri Lanka for the giving of notices to him, a notice posted up in the registered office of the Company shall be deemed to be duly given to him at the expiration of 24 hours from the time when it is so posted up. and That the existing Article 153 of the Articles of Association be deleted and the following Article be substituted therefor: 153. Notwithstanding anything in these Articles contained the Directors may at the cost and expense of the Company, cause any notice or circular to members to be sent by airmail to the address outside Sri Lanka of whose address the Company or its Secretaries and/or Agents and Secretaries shall be aware. A notice so sent by airmail; shall be deemed to have been served within 24 hours after the posting of the same. By Order of the Board Corporate Managers & Secretaries (Private) Limited Secretaries Colombo 29th May, 2012 Special Resolution Resolved That the existing Article 145 of the Articles of Association be deleted and the following Article be substituted therefor: 145. Any member whose registered address is not within Sri Lanka, may name an address, within Sri Lanka which for the purpose of notice, shall be considered as his registered address.

5 Annual Report Note 1. Any member of the Company who is entitled to attend and vote may appoint a proxy to attend and vote instead of him or her. A proxy need not be a member of the Company. 2. A Form of Proxy for the Meeting is enclosed with this Report. 3. The instrument appointing a proxy should reach the Registered Office of the Company s Secretaries, Corporate Managers & Secretaries (Private) Limited, No. 8-5/2, Leyden Bastian Road, York Arcade Building, Colombo 01, not less than 48 hours before the time appointed for the holding of the meeting. 6. A Special Notice has been received by the Company from a shareholder giving notice of the intention to move the following Resolution as an Ordinary Resolution at the Annual General Meeting: Resolved That Mr. N. H. B. S. Perera who is eighty one years of age be and is hereby reappointed a Director of the Company and it is further specially declared that the age limit of seventy years referred to in Section 210 of the Companies Act No.7 of 2007 shall not apply to the said Director, Mr. N. H. B. S. Perera. 4. A Special Notice has been received by the Company from a shareholder giving notice of the intention to move the following Resolution as an Ordinary Resolution at the Annual General Meeting: Resolved That Mr. R. N. Bopearatchy who is seventy one years of age be and is hereby reappointed a Director of the Company and it is further specially declared that the age limit of seventy years referred to in Section 210 of the Companies Act No.7 of 2007 shall not apply to the said Director, Mr. R. N. Bopearatchy. 5. A Special Notice has been received by the Company from a shareholder giving notice of the intention to move the following Resolution as an Ordinary Resolution at the Annual General Meeting: Resolved That Mr. A. Rajaratnam who is seventy years of age be and is hereby reappointed a Director of the Company and it is further specially declared that the age limit of seventy years referred to in Section 210 of the Companies Act No. 7 of 2007 shall not apply to the said Director, Mr. A. Rajaratnam.

6 4 Annual Report 2012 Chairman s Review I take pleasure in welcoming you to the Thirty-Seventh Annual General Meeting of and in presenting to you the Annual Report of the Company together with the Financial Statements for the year ended 31st March During the course of the year under review the Company invested in acquiring a major holding in Agarapatana Plantations Ltd. for Rs Billion and Waverly Power (Pvt) Ltd. for Rs. 34 Million. Resulting from these changes, will no longer be an operational Company and will be the Holding Company of Agarapatana Plantations Ltd. and Waverly Power (Pvt) Ltd. Agarapatana Plantations Ltd. is one of the largest Plantation Companies in the island consisting of 21 Tea Properties 10 Estates in the High Grown Uva Region and 11 Estates in the High Grown Agras Valley Region. The Company produces around 9 Million kilos of tea per annum. During the year ending March 2012, the performance of the Company was adversely affected by an unprecedented increase in labour wages and related payments, and the depressed international tea market due to political instability in the Middle East and economic instability in Euro Zone Countries. As a result of these factors, the Company operated at a significant loss. However, with the devaluation of the Rupee in the early part of this calendar year, the tea market has strengthened and improved prices are anticipated this year. Agarapatana Plantations Ltd. has already taken steps to improve the land and labour productivity and minimize the adverse effects of the wage increase. The Company also has long term plans to further improve productivity by replanting the poor yielding fields and diversifying the uneconomic low-yielding areas out of tea into timber and alternate crops. Performance The Company operated at a final loss of Rs. 267 Million, which includes a provision of Rs. 265 Million for impairment in the decline in the value of investment in Agarapatana Plantations Ltd. The Group loss for the year, after consolidation of the operational loss of Agarapatana Plantations Ltd. for the year ending March 2012 and the impairment provision against goodwill, is Rs. 660 Million. It is to be noted that when, as a result of the ongoing productivity improvements and management initiatives, Agarapatana returns to profitable operations with a corresponding improvement in the share value, the impairment provisions referred to will be written back. In conclusion, I wish to thank my fellow Directors and all staff for their unstinted support and assistance throughout the year. A. Rajaratnam Chairman 24th May, 2012 Waverly Power (Pvt) Ltd. is a Mini Hydro Project which is in the process of being constructed on Waverly Estate of Agarapatana Plantations Ltd. The Palang Oya which flows through this estate is being tapped and the rated generation capacity is 1.2 MWs. The civil engineering works are almost complete and the equipment is now in-situ. We expect to commence power generation by the end of August and the annual net revenue of this project is expected to be about Rs. 80 Million.

7 Annual Report Board of Directors A. Rajaratnam - Chairman FCA Mr. A. Rajaratnam joined the Board in 1997 and was appointed Chairman in the year He serves as Chairman of The Colombo Fort Land & Building Company PLC (CFLB) and several listed and unlisted companies within the CFLB Group in addition to holding other directorships within the Group. S. D. R. Arudpragasam - Director FCMA (UK) Mr. S. D. R. Arudpragasam was appointed to the Board in He holds the position of Deputy Chairman on the Boards of The Colombo Fort Land & Building Company PLC (CFLB) and Lankem Ceylon PLC. Mr. Arudpragasam also functions as Managing Director of E.B. Creasy & Company PLC in addition to serving on the Boards of other Companies within the CFLB Group. R. N. Bopearatchy - Director B.Sc. (Cey.),Dip. BM., MBA (Univ. of Col.) Mr. R. N Bopearatchy was appointed to the Board in the year He has considerable expertise in product development, manufacturing and marketing of pesticides, pharmaceuticals and consumer products. Soon after graduation he was employed in research in the Plant Pathology Division of the Tea Research Institute and subsequently joined Chemical Industries Colombo Ltd., and was appointed to its Board. He also served on the Boards of Crop Management Services (Pvt) Ltd., the managing agents for Mathurata Plantations Ltd., CIC Fertilizers Ltd. and Cisco Speciality Packaging (Pvt) Ltd. He has been a former Chairman of the Pesticide Association of Sri Lanka and the Toxicological Society of Sri Lanka and is now the Chairman of the International Mosquito Spiral Manufacturers Association (IMSMA). Mr. R. N. Bopearatchy currently holds several other directorships within The Colombo Fort Land & Building Group. Anushman Rajaratnam - Director B.Sc. (Hons.), CPA, MBA Mr. Anushman Rajaratnam was appointed to the Board in He has spent several years working overseas as a Consultant for a leading Accountancy Firm. He currently holds the position of Managing Director, Lankem Ceylon PLC amongst other directorships. D. L. Vitharana - Director MNI(London), MBA, M.Sc. (UK) Mr. D. L. Vitharana was appointed to the Board in He joined Lankem Ceylon PLC in 1997 and has headed the Lankem Agro cluster since He is currently the Chief Operating Officer of Lankem Ceylon PLC and also serves on the Boards of several subsidiaries of the Lankem Group. K. P. David - Director FCMA (UK), FCMA, FIPFM, CGMA Mr. K. P. David was appointed to the Board in October Having commenced his career in the banking sector, he joined E. B. Creasy & Company PLC as Group Accountant in Mr. David also serves on the Board of Lankem Ceylon PLC and several of its subsidiary companies. A. R. Peiris - Director B.Sc. (Cey.), FCMA (UK), CGMA Mr. A. R. Peiris was appointed to the Board in October He has served the Petroleum Corporation for 10 years in Technical, Planning & Finance Divisions and at the time he left the Corporation in 1979, he was the head of the Refinery Finance Division. Thereafter, he joined National Development Bank PLC where he held several senior positions for 24 years. He has held directorships in several reputed public listed and unlisted companies. Mr. Peiris also serves on the Board of Lankem Ceylon PLC and several of its subsidiary companies as well as on certain Boards in The Colombo Fort Land & Building Group. He is also a member of the Board of Tess Agro PLC and functions as the Chairman of its Audit Committee. R. T. Weerasinghe - Director BBA-USA Mr. R. T. Weerasinghe was appointed to the Board in October He joined Darley Butler & Company Limited in 1994 as a Trainee Product Manager and was seconded to Lankem Ceylon PLC as the Marketing Manager of the Consumer Division in He was promoted as General Manager of the Consumer Division in 2005 and was also appointed as the General Manager of the Paints Division. In addition he was also appointed as the Head of Industrial Chemicals Division in He possess expertise in the fields of Marketing and Management. Mr. Weerasinghe also serves on the Board of Lankem Ceylon PLC. S. Rajaratnam - Director B.Sc, CA Mr. S. Rajaratnam was appointed to the Board in April He holds a Bachelor of Science Degree in Business Administration from Boston College, USA and is a member of the Institute of Chartered Accountants in Australia. He has been associated with overseas companies in the field of finance. He also holds the position of Deputy Managing Director of E.B. Creasy & Company PLC in addition to serving on several Boards of The Colombo Fort Land & Building Group.

8 6 Annual Report 2012 Board of Directors C. P. R. Perera - Director Mr. C. P. R. Perera was appointed to the Board in July He serves as a Director in several Companies in The Colombo Fort Land & Building Group and also holds directorships in other private and public companies. He is a past Chairman of the Sri Lanka Tea Board, Sri Lanka Insurance Corporation, PERC and Bank of Ceylon. He retired as Chairman of Forbes & Walker Ltd and its subsidiary companies in June 2005 after almost 44 years of service. He presently functions as the Chairman of Ceylon Tea Brokers PLC and Capital Alliance Finance PLC. He is a Director of the Sri Lanka Business Development Center (SLBDC) and a Board Member of the Outward Bound Trust of Sri Lanka. Mr. Perera has served as a Committee Member of the Ceylon Chamber of Commerce, The Planters Association of Ceylon, and on the Committee of Management of the Ceylon Planters Provident Society. N. H. B. S. Perera - Director B.Sc. (Cey) Mr. N. H. B. S. Perera joined the Board in the year He is a former Chairman of Harrisons (Colombo) Ltd, and the Pesticides Association of Sri Lanka. He has held office as Deputy Chairman of the Planters Association of Sri Lanka and has functioned as Group Director of The Maharaja Organisation Ltd. Mr. Perera has also served as Director on the Board of Harrison Lister (Colombo) Ltd, and several plantation company boards such as Aislaby Estates Ltd, Attampettia Estates Ltd., Newburgh Estates Ltd, Kinross Estates Ltd, and Lunuwa Plantations Ltd, prior to nationalisation. He presently serves on the Boards of Lankem Ceylon PLC, The Colombo Fort Land & Building Company PLC and Lankem Tea & Rubber Plantations (Pvt) Ltd. Mr. Perera has considerable expertise in the field of developing and marketing Agri Chemicals, managing of plantation companies, manufacture and distribution, shipping and warehousing.

9 Annual Report Annual Report of the Board of Directors The Board of Directors of present their Report on the affairs of the Company together with the Audited Financial Statements for the year ended 31st March, The details set out herein provide the pertinent information required by the Companies Act No. 07 of 2007, and the Colombo Stock Exchange Listing Rules and are guided by recommended best practices. General The Company was re-registered on 19th November 2007 as required under the Companies Act No. 07 of Principal Activities and Business Review The principal activities of the Company were Road Construction, provision of Waterproofing and Industrial Flooring. During the year the Company changed its line of business to operate mainly as an Investment Holding Company. The change of business activities was approved by a Special Resolution passed unanimously at the Extraordinary General Meeting of the Company held on 5th January, The Chairman s Review, together with the Financial Statements reflects the state of affairs of the Company. The Directors to the best of their knowledge and beliefs, confirmed that the Company has not engaged in any activities that contravene laws and regulations. Financial Statements The Financial Statements of the Company are given on pages 16 to 55. Auditors Report The Auditors Report on the Financial Statements is given on page 15. Accounting Policies The accounting policies adopted in the preparation of the Financial Statements are given on pages 20 to 29. There were no changes in the accounting policies adopted. Interest Register Directors Interest in Transactions The Directors have made general disclosures as provided for in Section 192 (2) of the Companies Act No. 07 of Arising from this, details of contracts in which they have an interest are disclosed in Note 27 on pages 50 to 53. Directors Interest in Shares Directors of the Company who have an interest in the shares of the Company are required to disclose, their shareholdings and any acquisitions / disposals to the Board in compliance with Section 200 of the Companies Act. Details pertaining to Directors direct and indirect shareholdings are set out below. Name of Director No. of Shares As at As at Mr. A. Rajaratnam 10, Mr. S. D. R. Arudpragasam 20,000 - Mr. A. R. Peiris 32,000 - Mr. K. P. David 4,314 4,314 Directors Remuneration The Company did not pay any emoluments during the financial year 2011/2012 (2010/2011- Nil). Corporate Donations No donations were made during the year (2010/ Nil). Directorate The names of the Directors who held office during the financial year are given below. Brief profiles of the Directors appear on pages 05 and 06. Mr. A. Rajaratnam - Chairman Mr. S. D. R. Arudpragasam Mr. R. N. Bopearatchy Mr. Anushman Rajaratnam Mr. D. L. Vitharana Mr. K. P. David Mr. A. R. Peiris Mr. R. T. Weerasinghe Mr. S. Rajaratnam - Appointed on 1st April 2011 Mr. C. P. R. Perera - Appointed on 28th July 2011 Mr. N. H. B. S. Perera - Appointed on 30th September 2011 Messrs. S. Rajaratnam, C. P. R. Perera and N. H. B. S. Perera, Directors, were appointed during the financial year on 1st April, 28th July and 30th September 2011 respectively. In terms of Articles 84 and 85 of the Articles of Association, Messrs. Anushman Rajaratnam and A. R. Peiris retire by rotation and being eligible offer themselves for re-election.

10 8 Annual Report 2012 Annual Report of the Board of Directors Mr. R. N. Bopearatchy who is over seventy years of age offers himself for reappointment under and by virtue of a Special Notice received from a shareholder of the Company which is referred to in the Notice of Meeting. Mr. A. Rajaratnam who is seventy years of age offers himself for reappointment under and by virtue of a Special Notice received from a shareholder of the Company which is referred to in the Notice of Meeting. Mr. N. H. B. S. Perera who is over seventy years of age offers himself for reappointment under and by virtue of a Special Notice received from a shareholder of the Company which is referred to in the Notice of Meeting. The Board of Directors is responsible for determining the strategic direction of the Company and setting corporate values. By identifying and setting limits for the principal risks applicable to the various groups of stakeholders and exercising adequate controls, the Directors strengthen the safety and soundness of the Company. Auditors The Financial Statements of the Company for the year have been audited by Messrs KPMG the retiring Auditors, who have expressed their willingness to continue as Auditors of the Company and are recommended for reappointment. A resolution to reappoint them and to authorise the Directors to determine their remuneration will be proposed at the Annual General Meeting. The Auditors, Messrs KPMG were paid Rs. 290,000 (2010/2011- Rs. 250,000) as audit fees and fees for audit-related services by the Company. Further, there were no non-audit related services during the year 2011/2012 (2010/ Nil). As far as the Directors are aware the Auditors do not have any relationship (other than that of an Auditor) with the Company. The Auditors do not have any interests in the Company. Revenue The Company achieved a Turnover of Rs. 6,205,687 during the year as against Rs. 96,921,661 in 2010/2011. Results The Company made a Net loss before Tax of Rs. 266,978,471 against a loss before Tax of Rs. 27,092,398 in 2010/2011. Investments Investments made by the Company are given in Note 15 and 16 on pages 39 to 41. Property, Plant & Equipment During 2011/2012 the Company did not invest in Property, Plant & Equipment (2010/ Rs. 33,630/-). The Directors are of the opinion that the net amounts at which Land and Other Property, Plant & Equipment appear in the Balance Sheet are not greater than their market values as at 31st March, Stated Capital The Stated Capital of the Company as at 31st March, 2012 was Rs. 1,408,005,620/- and is represented by 60,000,000 issued and fully paid ordinary shares. During the year the Company made a Rights Issue of shares the details of which are disclosed in Note 21 to the Financial Statements on page 43. Reserves The total reserves of the Company as at 31st March, 2012 comprised of revaluation reserve of Rs. 6,794,000 general reserves of Rs. 500,000 and accumulated loss of Rs. 360,790,627 whereas the total reserves of the Company as at 31st March, 2011 comprised of revaluation reserve of Rs. 6,794,000 general reserves of Rs. 500,000 and accumulated loss of Rs. 86,123,513. Taxation The Company s liability to taxation has been computed in accordance with the provisions of the Inland Revenue Act No. 10 of 2006 and subsequent amendments thereto. The Company is liable to ESC at the rates of 0.25%, 0.5% and 1%. However, the Company has not paid ESC during the year under review (2010/ Rs. 329,005). Tax applicable rate for VAT for the Company is 12% of the turnover which amounts to Rs. 750,314 whereas the input VAT amounts to Rs. 5,650,785 Therefore, the VAT recoverable as at 31st March, 2012 is Rs. 4,900,471. Share Information Information relating to earnings, dividend, net assets, market value per share and share trading are given on pages 33,56,57 and 58. Events Occurring after the Balance Sheet Date Events occurring after the Balance Sheet date that would require adjustments to or disclosure are disclosed in Note 32 on page 55.

11 Annual Report Capital Commitments and Contingent Liabilities Capital commitments and contingent liabilities as at the Balance Sheet date are disclosed in Notes 28 and 29 on page 53 and 54. Employment Policy The Company s recruitment and employment policy is nondiscriminatory. The occupational health and safety standards receive substantial attention. Appraisals of individual employees are carried out in order to evaluate their performance and realise their potential. This process benefits the Company and the employees. Going Concern The Directors, after making necessary inquiries and reviews including reviews of the Company s budget for the subsequent year, capital expenditure requirements, future prospects and risks, cash flows and borrowing facilities, have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. Therefore, the going concern basis has been adopted in the preparation of the Financial Statements. For and on behalf of the Board, Shareholders It is the Company s policy to endeavour to ensure equitable treatment to its shareholders. Statutory Payments The Directors, to the best of their knowledge and belief, are satisfied that all statutory payments due in relation to employees and the Government have been made promptly, up to date. Environmental Protection The Company s business activities can have direct and indirect effects on the environment. It is the Company s policy to minimize any adverse effect its activities have on the environment and to promote co-operation and compliance with the relevant authorities and regulations. The Directors confirm that the Company has not undertaken any activities which have caused or are likely to cause detriment to the environment. R. N. Bopearatchy K.P. David Director Director By Order of the Board Corporate Managers & Secretaries (Private) Limited Secretaries Colombo 24th May, 2012 Internal Control The Directors acknowledge their responsibility for the Company s system of internal control. The system is designed to give assurance regarding the safeguarding of assets, the maintenance of proper accounting records and the reliability of financial information generated. However, any system can ensure only reasonable and not absolute assurance that errors and irregularities are either prevented or detected within a reasonable period of time. The Board is satisfied with the effectiveness of the system of internal control for the period up to the date of signing the Financial Statements.

12 10 Annual Report 2012 Corporate Governance The Corporate Governance structure spells out the rules and procedures for making decisions on the Corporate Affairs. It also provides the structure through which the objectives of the Company are set out, as well as the means of attaining and monitoring the performance of those objectives. Sound Corporate Governance is reliant on external market place, commitment and legislation, plus a healthy Board Culture which safeguards policies and processes. BOARD Composition of the Board The Directors are from varied business and professional backgrounds. Their expertise enables them to exercise independent judgement and their views carry substantial weight in decision making. The Board comprises of Eleven Non-Executive Directors two of whom are Independent. These Directors are named below: Mr. A. Rajaratnam - Chairman - Non-Executive Mr. S. D. R. Arudpragasam - Non-Executive Mr. R. N. Bopearatchy - Non-Executive Mr. Anushman Rajaratnam - Non-Executive Mr. D. L. Vitharana - Non-Executive Mr. K. P. David - Non-Executive Mr. A. R. Peiris - Non-Executive Mr. R. T. Weerasinghe - Non-Executive Mr. S. Rajaratnam - Non-Executive (Appointed on 1st April 2011) Mr. C. P. R. Perera - Independent - Non-Executive (Appointed on 28th July 2011) Mr. N. H. B. S. Perera - Independent - Non-Executive (Appointed on 30th September 2011) The Non-Executive Directors have submitted declarations of their Independence or Non-Independence to the Board of Directors. Despite Mr. C. P. R. Perera being a Director of the Company s subsidiary and having served on the boards of certain subsidiaries of the Parent Entity for more than nine years and being on the Board of a Company which has a significant shareholding in another, the Board having taken into consideration all other circumstances listed in the Rules pertaining to the Criteria for Defining Independence is of the opinion that Mr. C. P. R. Perera is nevertheless independent. Although Mr. N. H. B. S. Perera is a Director of the Ultimate Parent Company which has a significant shareholding in the parent company of the Listed Entity and despite having served on the Board of a subsidiary of the said Parent Company for more than nine years, the Board having taken into consideration all other circumstances listed in the Rules pertaining to the Criteria for Defining Independence is of the opinion that Mr. N. H. B. S. Perera is nevertheless independent. Board Meetings In addition to Board Meetings, matters are referred to the Board and decided by resolutions in writing. Management accounts and the progress reports are reviewed at Board Meetings as routine matters. Other matters of importance such as the Company s business policies and strategy formulation is reviewed to assure growth and the successful implementation of such strategies. Further approvals relating to the annual budgets, capital expenditure, new investments and new ventures are granted after consideration. Company Secretaries and Independent Professional Advice The Directors may seek advice from Corporate Managers & Secretaries (Private) Limited who are qualified to act as Secretaries as per the provisions of the Companies Act No. 07 of Advice is also sought from independent external professionals whenever the Board deems it necessary. Independent Judgement The Board is committed to exhibit high standards of integrity and independence of judgement. Each Director dedicates the time and effort necessary to carry out his responsibilities. Financial Acumen The Board includes six finance professionals who possess the necessary knowledge to offer the Board guidance on matters of finance. Management Meetings The management team meets frequently to review progress, discuss operational issues and other important developments that require consideration and follow up actions. Appointment and Re-election of Directors The Board as a whole decides on the appointment of Directors in accordance with the Articles of Association of the Company. All appointments are approved by the Board of the Ultimate Parent Company, The Colombo Fort Land & Building Company PLC. In terms of the Articles of Association of the Company a Director appointed to the Board holds office until the next Annual General Meeting and seeks re-election by the shareholders at that meeting. The Articles of Association requires one- third or a number nearest to one-third of the Directors (exculding

13 Annual Report Chairman, Chief Executive, Managing or Joint Manging Director) in office to retire at each Annual General Meeting. The Directors to retire are those who have been longest in office since their last election. Retiring Directors are eligible for re-election by the shareholders. Constructive Use of Annual General Meeting / General Meetings The Board considers the Annual General Meeting / General Meetings an opportunity to communicate with shareholders and encourages their participation. Questions raised by the shareholders are answered and an appropriate dialogue is maintained with them. Remuneration Committee The Remuneration Committee of the Ultimate Parent Company The Colombo Fort Land & Building Company PLC (CFLB) functions as the Company s Remuneration Committee. However in the absence of any emoluments or key management compensation being paid for the year, the Committee did not meet during the period under review. Major Transactions In terms of the provisions regulating Major transactions in the Companies Act No. 7 of 2007 a Special Resolution was passed unanimously by the shareholders at the Extraordinary General Meeting of the Company held on 21st April 2011, for the proposed acquisition by of 47,417,276 ordinary shares of Agarapatana Plantations Ltd (APL) (constituting a total equity stake of 61.88% in APL) to be purchased from Lankem Plantation Holdings Ltd and Kotagala Plantations PLC (Sellers) at a total investment cost of Rs. 1,185,431,900/- (i.e. on the basis of a price of Rs. 25/- per share). Consequent to the aforementioned purchase of an equity stake of 61.88% by (LDEV) in Agarapatana Plantations Ltd., at an investment cost of Rs.1,185,431,900/- the said company became a subsidiary of Lankem Developments PLC. Financial Reporting The Board of Directors considers the timely publication of its Annual and Quarterly Financial Statements as a high priority. These publications include financial and non-financial information in order to facilitate the requirements of the existing and potential shareholders. The Financial Statements are prepared in accordance with the Sri Lanka Accounting Standards. Audit Committee The Audit Committee of Lankem Ceylon PLC functioned as the Company s Audit Committee up to August The present Audit Committee was constituted in January The Audit Committee Report is set out on pages 13 and 14.

14 12 Annual Report 2012 Risk Management Review Risk management involves identifying potential risk exposure faced by the Company and implementing proper risk management techniques to mitigate such risks. A disciplined approach to risk is important in a diversified organisation such as ours in order to ensure that we are executing according to our strategic objectives and that we only accept risk for which we are adequately compensated. The s Board of Directors (Board) have overall responsibility for risk oversight with a focus on the most significant risks facing the Company. We considered risk management as a vital component in our operations and build upon management s risk assessment and mitigation processes, which include standardised reviews of long-term strategic and operational planning, regulatory and litigation compliance, health, safety and environmental compliance, financial reporting and controls and information technology and security. Risk Factors 1. Financial Risk Financial risk covers the broad area of risk and mainly incorporates credit risk and market risk stemming from business operations. 1.1 Credit Risk Management Credit risks arise due to the non-payment by debtors which can lead to working capital issues. Lankem Developments PLC implements proper credit controls and debt collection policies to ensure that the Company selects only reliable distributors who are able to honor their debts. 1.2 Market Risk Management Market risk refers to the risk arising from the volatilities in market forces. faces market risks in the financial sphere in terms of the local rates of interest, inflation and exchange rates. Given the current business environment, the Company is in a position to manage the interest rate risk. The other market risk that the Company faces is the risk associated with raw material pricing Inflation Rate Risk mainly serves institutional clients. Upward movements in inflation will mainly reduce the purchasing power of individual as well as institutional customers. This will deteriorate the potential demand for Company products and increase the Company s cost base. The Company closely monitors fluctuations in price levels and focuses on the efficient management of its cost base so as to ensure the minimal increase in price to customers Foreign Exchange Risk operates in a business model where some of the raw material items are imported. As a result the Company is exposed to foreign exchange risk due to the fluctuation in foreign exchange rates. uses forward exchange rate for accounting purposes to minimise any adverse impact. 2. Business Risk New entrants into markets that is already present in as well as intensification of competition from existing players in existing markets are the significant business risk that the Company faces. Variation in consumer spending patterns is also a potential business risk. 3. Legal and Compliance Legal and compliance risk relates to changes in the Government and regulatory environment, compliance requirements with policies and procedures, including those relating to financial reporting, environmental health and safety, and intellectual property risks. Lankem Developments PLC continuously monitors regulatory changes in the environment and promptly responds and adapts to new changes Liquidity Risk Due to the nature of the businesses that Lankem Developments PLC operates in, we need to ensure that working capital cycles are properly maintained so as to ensure that operations are not compromised due to the lack of adequate working capital. implements appropriate cash flow management techniques.

15 Annual Report Audit Committee Report The Audit Committee has the responsibility of assisting the Board in fulfilling its overall responsibility to the shareholders in relation to the integrity of the Company s financial reporting process in accordance with the Companies Act and other legislative reporting requirements including the adequacy of disclosures in the Financial Statements in accordance with the Sri Lanka Accounting Standards. The Audit Committee also has responsibility to ensure that the internal controls of the Company are in accordance with legal and regulatory requirements. The Committee evaluates the performance and the independence of the Company s external audit functions. Composition The Audit Committee of the Parent Company, Lankem Ceylon PLC (LCPLC) functioned as the Company s Audit Committee upto August The Committee comprised of members of the Audit Committee of The Colombo Fort Land & Building Company PLC (CFLB) (Ultimate Parent Company) and an Independent Non-Executive Director of Lankem Ceylon PLC. The names of the members are set out below: Mr. R. Seevaratnam - Chairman (Independent, Non-Executive Director - CFLB) Mr. A. M. de S. Jayaratne - Member (Independent, Non-Executive Director - CFLB) Mr. R. Senathirajah - Member (Non-Executive Director - CFLB) Mr. A. C. S. Jayaranjan - Member (Independent, Non-Executive Director - LCPLC) Consequent to the change in the Holding Company of, during the interim period prior to the Company forming its own Audit Committee, the Interim Financial Statements for the six months ended September 2011 were scrutinised by the Audit Committee of the Ultimate Parent Company, The Colombo Fort Land & Building Company PLC (CFLB). The Company s own Audit Committee was constituted on 25th January 2012 and comprises of an Independent Non-Executive Director of The Colombo Fort Land & Building Company PLC (CFLB) (Ultimate Parent Company) and the two Independent Non-Executive Directors of (LDPLC). The names of the members are set out below: Mr. A. M. de S. Jayaratne - Chairman (Independent, Non-Executive Director - CFLB) Mr. C. P. R. Perera - Member (Independent, Non-Executive Director - LDPLC) Mr. N. H. B. S. Perera - Member (Independent, Non-Executive Director - LDPLC) The Committee has a blend of experience in the commercial sector, financial expertise with high standing of integrity and business acumen in order to carry out their role efficiently and effectively. The Company s Secretaries, Corporate Managers & Secretaries (Private) Limited function as the Secretaries to the Audit Committee. Meetings and Attendance The former Audit Committee has met on two occasions during the period April to August 2011 and the present Committee has met once since being constituted in January 2012 upto the year ended 31st March, The attendance of the former Committee was as follows, R. Seevaratnam - Chairman 2/2 A.M. de S. Jayaratne 2/2 Mr. R. Senathirajah 1/2 Mr. A.C.S Jayaranjan 2/2 The attendance of the present Committee was as follows: Mr. A. M. de S. Jayaratne - Chairman 1 Mr. C. P. R. Perera 1 Mr. N. H. B. S. Perera 1 Other members of the Board and the Management Committee, were present at discussions where appropriate. The proceedings of the Audit Committee are regularly reported to the Board of Directors. Terms of Reference The Committee is governed by the specific terms of reference set out in the Audit Committee Charter. The Committee focuses on the following objectives in discharging its responsibilities taking into consideration the terms of reference together with the requirements of the Listing Rules of the Colombo Stock Exchange: (a) Risk Management (b) Efficiency of the system of internal controls (c) Independence and objectivity of the external (statutory) Auditors (d) Appropriateness of the principal accounting policies used (e) Financial Statement integrity

16 14 Annual Report 2012 Audit Committee Report Compliance During the year under review, the Committee has assisted the Board in ensuring compliance with the statutory provisions prior to publication of Interim Financial Statements and the Annual Report. The Committee has taken necessary measures to ensure that the Interim Financial Statements and the Annual Report are timely published and they are prepared and presented in accordance with Sri Lanka Accounting Standards and also in compliance with the Companies Act and other regulatory requirements. The Committee has assessed the adequacy of existing internal controls and risk management procedures and recommends to the Board, additional controls and risk mitigating strategies that could be implemented to strengthen the existing internal control system. Further, the Committee has reviewed the routine operations of the Company and assessed the future prospects of its business operations and accordingly makes sure that the going concern assumption used in the preparation of the Financial Statements is appropriate. External Audit The Company has appointed KPMG as its External Auditors for the financial year ended 31st March, 2012 and the services provided by them are segregated between audit/assurance services and other advisory services. The Committee has reviewed the progress and conduct of the statutory audit function and discussed the audit-related issues with the Auditors. Messrs KPMG has also issued a declaration as required by the Companies Act No. 07 of 2007, that they do not have any relationship or interest in any of the companies in the Group, which may have a bearing on the independence of their role as Auditors. The Committee after evaluating the independence and performance of the External Auditors, has recommended to the Board the reappointment of Messrs KPMG for the financial year ending 31st March, 2013 subject to the approval of the Shareholders at the Annual General Meeting of the Company. A. M. De S. Jayaratne Chairman Audit Committee 24th May, 2012

17 Annual Report Independent Auditors Report TO THE SHAREHOLDERS OF LANKEM DEVELOPMENTS PLC Report on the Financial Statements We have audited the accompanying Financial Statements of the Company, the consolidated financial statements of the Company and its subsidiaries as at 31st March 2012 which comprise the balance sheet as at 31st March 2012, and the Income Statement, Statement of Changes in Equity and Cash Flow Statement for the year then ended, and a summary of significant accounting policies and other explanatory notes set out on page 16 to 55 of the annual report. 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 Opinion Our 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 policies used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Opinion Company In our opinion, so far as appears from our examination, the Company maintained proper accounting records for the year ended 31st March 2012 and the Financial Statements give a true and fair view of the Company s state of affairs as at 31st March 2012 and its loss and cash flows for the year then ended in accordance with Sri Lanka Accounting Standards. Group In our opinion, the consolidated Financial Statements give a true and fair view of the state of affairs as at 31st March 2012 and the loss 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. Emphasis of Matter Without qualifying our opinion we draw attention to Note 31 to these Financial Statements regarding matters that may cast significant doubt that the company and its subsidiary will be able to continue as a going concern. Report on Other Legal and Regulatory Requirements These Financial Statements also comply with the requirements of Sections 153(2) to 153(7) as appropriate of the Companies Act No. 07 of CHARTERED ACCOUNTANTS 24th May, 2012 Colombo 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.

18 16 Annual Report 2012 Income Statement GROUP COMPANY For the year ended 31st March Notes Rs. Rs. Rs. Revenue 4 1,597,338,170 6,205,687 96,921,661 Cost of Sales (1,913,292,387) (6,007,987) (74,614,271) Gross Profit / (Loss) (315,954,217) 197,700 22,307,390 Other Income 5 16,030,113 1,140,172 1,717,298 Distribution Cost (507,477) (507,477) (16,222,344) Administrative Expenses (139,471,110) (3,473,448) (26,107,452) Other Expenses 6 (216,038,113) (265,255,956) (6,027,412) Excess on Acquisition 58,917, Net Finance Income / (Expense) 7 (39,117,433) 920,538 (2,759,878) Loss before Tax 8 (636,140,328) (266,978,471) (27,092,398) Income Tax Expense 9 (23,761,573) (2,418) 80,188 Loss for the Year (659,901,901) (266,980,889) (27,012,210) Attributable to: Equity Holders of the Parent (470,129,673) (266,980,889) (27,012,210) Minority Interest (189,772,228) - - (659,901,901) (266,980,889) (27,012,210) Loss per Share 10 (9.06) (5.15) (3.91) The Notes from pages 20 to 55 form an integral part of these financial statements. Figures in brackets indicate deductions.

19 Annual Report Balance Sheet GROUP COMPANY As at 31st March Notes Rs. Rs. Rs. ASSETS Non-Current Assets Property, Plant and Equipment ,114,475 7,041,213 7,099,525 Mature / Immature Plantations 12 1,267,892, Leasehold Properties ,042, Intangible Assets ,751, Investments in Subsidiaries 15-1,129,592,597 - Other Long Term Investments 16 14,024,427 4,104,669 12,104,669 Total Non-Current Assets 3,268,825,588 1,140,738,479 19,204,194 Current Assets Inventories ,612,494-6,038,512 Cost of Work Not Certified ,261 Trade & Other Receivables ,750,604-7,879,750 Amounts due from Related Parties -Trade Receivables ,030 Amounts due from Related Parties ,628,651 80,000,000 - Tax Recoverable 19 84,439,936 5,245,625 5,376,324 Short Term Investments ,614,600 18,614,600 - Cash & Cash Equivalents ,805,086 10,193,434 4,455,426 Total Current Assets 1,019,851, ,053,659 25,022,303 Total Assets 4,288,676,959 1,254,792,138 44,226,497 EQUITY AND LIABILITIES Equity Attributable to Equity Holders of the Parent Stated Capital 21 1,408,005,620 1,408,005,620 80,505,620 Capital Reserve 6,794,000 6,794,000 6,794,000 General Reserve 500, , ,000 Revenue Reserve (565,108,845) (360,790,627) (86,123,513) 850,190,775 1,054,508,993 1,676,107 Minority Interest 4,401, Total Equity 854,592,126 1,054,508,993 1,676,107 Non-Current Liabilities Interest Bearing Borrowings ,696, Deferred Income ,596, Deferred Tax Liabilities 24 9,345 9,345 6,927 Net Liability to the Lessor of JEDB / SLSPC Estate , Retirement Benefit Obligations ,906, , ,901 Total Non-Current Liabilities 1,488,362, , ,828 Current Liabilities Trade & Other Payables ,667,387 1,318,417 4,798,109 Advance Received for Contracts 81,883 81,883 81,883 Loans Payable to Related Parties ,000,000 25,000,000 - Amounts due to Related Parties ,499,073 2,234,063 30,857,183 Interest-bearing Borrowings ,594, Bank Overdraft ,879, ,492,162 6,693,387 Total Current Liabilities 1,945,722, ,126,525 42,430,562 Total Liabilities 3,434,084, ,283,145 42,550,390 Total Equity and Liabilities 4,288,676,959 1,254,792,138 44,226,497 Net Assets per Share The Notes on pages 20 to 55 form an integral part of these financial statements. Figures in brackets indicate deductions. I certify that these financial statements have been prepared in compliance with the requirements of the Companies Act No 07 of George Fernando Assistant General Manager - Finance The Board of Directors is responsible for the preparation and presentation of these financial statements. Approved and signed for and on behalf of the Board of Directors of. R. N. Bopearatchy K.P. David Director Director Colombo 24th May, 2012

20 18 Annual Report 2012 Statement of Changes in Equity Equity Attributable to Equity Holders of the Parent GROUP Stated Revaluation General Accumulated Total Minority Total Capital Reserve Reserve Loss Interest Rs. Rs. Rs. Rs. Rs. Rs. Rs. Balance as at 1st April ,505,620 6,794, ,000 (59,111,303) 28,688,317-28,688,317 Loss for the year (27,012,210) (27,012,210) - (27,012,210) Balance as at 31st March ,505,620 6,794, ,000 (86,123,513) 1,676,107-1,676,107 Effects of Acquisitions, Disposals and Change in } Adjustment due to change in Holding ,004, ,004,145 Rights Issue of Shares 1,327,500, ,327,500,000-1,327,500,000 Direct Cost on Rights Issue (7,686,225) (7,686,225) - (7,686,225) Loss for the year (470,129,673) (470,129,673) (189,772,228) (659,901,901) Adjustments due to Debit Balances in Minority Interest (1,169,434) (1,169,434) 1,169,434 - Balance as at 31st March ,408,005,620 6,794, ,000 (565,108,845) 850,190,775 4,401, ,592,126 COMPANY Stated Revaluation General Accumulated Total Capital Reserve Reserve Loss Rs. Rs. Rs. Rs. Rs. Balance as at 1st April ,505,620 6,794, ,000 (59,111,303) 28,688,317 Loss for the year (27,012,210) (27,012,210) Balance as at 31st March ,505,620 6,794, ,000 (86,123,513) 1,676,107 Rights Issue of Shares 1,327,500, ,327,500,000 Direct Expenses on Rights Issue (7,686,225) (7,686,225) Loss for the year (266,980,889) (266,980,889) Balance as at 31st March ,408,005,620 6,794, ,000 (360,790,627) 1,054,508,993 The revaluation reserve relates to revaluation of freehold land and represents the increase in the fair value of the lands & buildings. The Notes from pages 20 to 55 form an integral part of these financial statements. Figures in brackets indicate deductions.