MERCANTILE SHIPPING COMPANY PLC ANNUAL REPORT 2015/2016 ANNUAL REPORT

Transcription

1 MERCANTILE SHIPPING COMPANY PLC ANNUAL REPORT 2015/2016 ANNUAL REPORT 2014/2015

2 Vision To pursue excellence for superior service with ships operated and maintained at the highest standards of quality to enhance the long term interests of all our stakeholders. Mission To maintain the position that "our customers are our partners in business". To expand our fleet of multipurpose ships and develop new business towards sustainable growth. To be a reliable and competent partner in the international shipping community and become the leading ship owner in Sri Lanka.

3 MERCANTILE SHIPPING COMPANY PLC 1 Contents 03 Notice of Meeting 04 The Chairman s Review 05 Report of the Directors 08 Directors Profiles 10 Corporate Governance 14 Audit Committee Report 15 Auditor s Report 17 Statement of Profit or Loss and Other Comprehensive Income 18 Statement of Financial Position 19 Statement of Changes in Equity 20 Cash Flow Statement 21 Notes to the Financial Statements 53 Shareholders Information 56 Five Year Summary 57 Form of Proxy

4 2 MERCANTILE SHIPPING COMPANY PLC Statutory Status COMPANY NAME Mercantile Shipping Company PLC LEGAL FORM Quoted Public Company with Limited Liability, Incorporated on the 17th of March REGISTERED NO. PQ 148 BOARD OF DIRECTORS A N U Jayawardena (Chairman, resigned w.e.f ) H A R K Wickramatileka (Acting Chairman) C P P G Hapudeniya (Deputy Chairman) T Kriwat (Managing Director) Capt. K Kriwat T N Jayasinghe S M D N Dharmapriya I A H Esufally (resigned w.e.f ) G M Vikum Pradeepa (resigned w.e.f ) (Mrs) K A C Wilson (resigned w.e.f ) (Mrs) C D A Peiris (appointed w.e.f ) Capt. R E G Codipilly (appointed w.e.f ) M S P Gunawardena (appointed w.e.f ) SECRETARIES Managers & Secretaries (Pvt) Ltd BANKERS Standard Chartered Bank Commercial Bank of Ceylon PLC AUDITORS Ernst & Young (Chartered Accountants) LAWYERS Dissanayake Amaratunga Associates (Attorneys-at-Law & Notaries Public) Julius & Creasy (Attorneys-at-Law & Notaries Public) REGISTERED OFFICE 108, Aluthmawatha Road, Colombo 15, Sri Lanka Tel: Fax: info@mercmarine.net Web:

5 MERCANTILE SHIPPING COMPANY PLC 3 Annual General Meeting Notice of Meeting Notice is hereby given that the 35th Annual General Meeting of Mercantile Shipping Company PLC will be held on 23rd September 2016 at a.m. at Park Premier Hall, Excel World, No. 330, T.B. Jayah Mawatha, Colombo 10 for the following purposes: Agenda 1. To receive and consider the Annual Report of the Board of Directors and the Statement of Audited Accounts for the year ended 31st March 2016 and the Report of the Auditors thereon. 2. Appointment of Directors Mrs. C.D.A. Peiris who has been appointed to the Board since the last Annual General Meeting in terms of Article 91 of the Articles of Association of the Company, being eligible for re-election. Capt. R.E.G. Codipilly who has been appointed to the Board since the last Annual General Meeting in terms of Article 91 of the Articles of Association of the Company, being eligible for re-election. Mr. M.S.P. Gunawardena who has been appointed to the Board since the last Annual General Meeting in terms of Article 91 of the Articles of Association of the Company, being eligible for re-election. 3. Re-election of Directors in terms of Section 211 of the Companies Act No.07 of Captain K. Kriwat, who has reached the age of 75 as a Director in terms of Section 211 of the Companies Act No.07 of 2007 retires by rotation and being eligible offers himself for re-election. Accordingly, the following resolution to be passed for this purpose, if thought fit. IT IS HEREBY RESOLVED: To re-elect Captain K. Kriwat, who has reached the age of 75 as a Director in terms of Section 211 of the Companies Act No. 7 of 2007 and it is specially declared that the age limit of 70 years referred to in Section 210 of the Companies Act No. 7 of 2007 shall not apply to the said Captain K. Kriwat. IT IS HEREBY RESOLVED: To re-elect Mr. T.N. Jayasinghe, who has reached the age of 72 as a Director in terms of Section 211 of the Companies Act No. 7 of 2007 and it is specially declared that the age limit of 70 years referred to in Section 210 of the Companies Act No. 7 of 2007 shall not apply to the said Mr. T.N. Jayasinghe 4. To re-appoint the Auditors Messrs. Ernst & Young and to authorize the Board of Directors to determine their remuneration. 4. To authorise Directors to determine contribution to Charities. 5. To consider any other business of which due notice has been given. By Order of the Board Managers & Secretaries (Private) Limited Secretaries Colombo 22nd August 2016 Note: A member entitled to attend and vote at the meeting is entitled to appoint a proxy to attend and vote in his/her stead and a Form of Proxy is enclosed for this purpose. The proxy need not be a member of the Company. The completed Form of Proxy must be deposited at the registered office No. 108, Aluthmawatha Road, Colombo 15, not less than forty eight hours before the time fixed for the meeting. Any Member or Proxy holder attending the meeting is kindly requested to bring this report along with his/her National Identity Card or Passport for identification purposes. Mr. T.N. Jayasinghe, who has reached the age of 72 as a Director in terms of Section 211 of the Companies Act No.07 of 2007 retires by rotation and being eligible offers himself for re-election. Accordingly, the following resolution to be passed for this purpose, if thought fit.

6 4 MERCANTILE SHIPPING COMPANY PLC The Chairman s Review /2016 It is my pleasure to welcome you all to the 35th Annual General Meeting of the Company. The shipping industry continues to operate in a climate of uncertainty due to the Global economic and political volatility. We still live in hope of the emergence of a stable environment necessary for the commencement of economic recovery. With charter rates continuing to be unstable in this uncertain economic environment and the resulting effect of the impossibility of having committed chartering arrangements, the vessel Mercs Uva was redelivered on the 11th of January 2016 terminating the ongoing chartering arrangement. This has compelled a different turn in the employment of the vessels. We are now moving from reliance on chartering to exploring new opportunities in the tramping trade. Vessels are now successfully employed on Voyage charter basis and other short term arrangements. The second vessel Mercs Uhana was also released from its long term chartering arrangement in April 2016 and has since been employed in the tramping trade. The positive side of this arrangement is that we are sometimes successful in getting better rates. However the timing of the cash collection has adversely affected cash flow projections, a situation that did not exist before. The German Bank has continued to cooperate with the Company in dealing with the servicing of the loan, and the Company continues to pay only the interest and a 25% component of the capital of the loan installment on a pay as you earn basis due to the prevailing cash position. During the year under review there have been some important adjustments in the accounts having a positive impact on the profitability of the Company and the Group as a whole Converting of the Euro loan to the Dollar and changing the base currency of MESL to the Dollar has resulted in a positive adjustment of approximately LKR 85 million which is a real impact. Furthermore the Company MSCL received an old cargo claim which realized approximately LKR 45 Million. However the positive impact from these two sources was eroded with the application of the accounting standard on the impairment of assets which resulted in the provision of LKR 755 million for the reduction in value of the vessels. The basis for this calculation had to take into consideration future revenue projections. The economic impact of current events such as Brexit and the incident in Turkey impelled us to be more conservative in forecasting these projections. Resulting from the above in the year 2015/2016 the Group made a net loss of approximately LKR 721 Million after tax, compared to a net loss of LKR 349 Million last year, whilst Mercantile Shipping Company PLC showed a net profit after tax of LKR. 31 Million in comparison to a net loss after tax last year of LKR 260 Million which included a write off of investments of LKR million in Mercantile Emerald Shipping (Pvt) Ltd. Mercantile Shipping Company PLC continues to receive a stable flow of income from rent and enjoys rent free space for its office. The group s negative financial position is mainly due to the challenges outlined above faced by Mercantile Emerald Shipping Private Ltd its fully owned subsidiary. However your Company has, in the present circumstances, taken the following measures to mitigate the problems faced. 1. Continue to keep the vessels in employment and operate with a high level of optism that we will be able to obtain increased rates at the given redelivery ranges in the tramping trade. 2. Continued control of operational and administrative costs 3. We continue to have close cooperation with the German Lending Bank with regard to the facility obtained and repayment of same. It remains for me to extend my appreciation and thanks to my fellow Board Members and to the Management for their continued support through this very difficult time. I take this opportunity to welcome the new members to the Board and extend my appreciation and gratitude to Mr Nimal Jayawardena our previous Chairman for his valuable guidance and commitment throughout the years. I also thank Mr Imtiaz Esufally, Mrs Kasturi Chellarajah Wilson and Mr Vikum Pradeepa for their contribution and support during their tenure as Directors. I also wish to thank the Shareholders especially, for their understanding and support extended during this very difficult period that we continue to face in the prevailing economic conditions. And lastly but not least extend my sincere thanks to the staff for their continued commitment and support to the Company. H A R K Wickrematileka Acting Chairman Colombo 15th August 2016

7 MERCANTILE SHIPPING COMPANY PLC 5 Annual Report of the Board of Directors on the Affairs of the Company The Directors are pleased to submit their report together with the Audited Accounts for the Company and the Group, for the year ended 31st March 2016, to be presented at the Thirty Fifth Annual General Meeting of the Company. Review of the Year The Chairman s review on page 04 describes the Company s affairs and mentions important events that occurred during the year, and up to the date of this report. This report together with the audited financial statements reflect the state of the affairs of the Company. Principal Activities / Core Business The main activity of the Company and subsidiaries is the business of the ship owners and operators. Financial Statements The financial statements prepared in compliance with the requirements of Section 151 of the Companies Act No 7 of 2007 are given on pages 17 to 52 in this annual report. Independent Auditor s Report The Auditor s Report on the financial statements is given on page 15 in this report. Accounting Policies The Accounting Policies adopted in preparation of the financial statements are given on pages 21 to 33 There were no changes in Accounting Policies adopted by the Company during the year under review. Financial Results/Profit and Appropriations The Income Statement is set out on page 17. Property, Plant & Equipment Information relating to movement in Property, Plant & Equipment during the year is disclosed under Note 13 to the financial statements. Market Value of Freehold Land The property owned by the Company at 441 K. Cyril C Perera Mawatha, Colombo 14 was last measured for fair value on the 23rd of March 2014 by Mr. S.J.A.N. Jayakody, a Professional Valuer, to an amount of Rs Million. The property owned by the Company at 108, Aluthmawatha Road, Colombo 15 was last measured for fair value on the 9th of April 2014 by Mr. S.J.A.N Jayakody a Professional Valuer, up to an amount of Rs.107 Million. Investments Details of long-term Investments held by the Company are given in Note 14 & 15 to the financial statements on page 41. Directors Responsibilities The Statement of the Directors Responsibilities is given on page 10 of this report. Corporate Governance The Company has complied with the corporate governance rules laid down under the listing rules of the Colombo Stock Exchange, and is given on page 10 to 14. Dividend The Directors do not recommend payment of a dividend for the financial year ended 31st March Reserves The Reserves and Accumulated Profit/Losses as at 31st March 2016 amount to (Rs. 1,143,084,013/-) as against a negative reserve of (Rs. 422,183,085/-) as at 31st March The breakup and the movement are shown in the Statement of Changes in Equity in the financial statements. Stated Capital As per the terms of the Companies Act No. 7 of 2007, the stated capital of the Company is Rs. 37,362,606/- as at 31st March The details are given in Note 20 to the financial statement on page 44. Post Balance Sheet Events There were no material events occurring after the Balance Sheet date that require adjustments, or disclosure which require adjustment in the Financial Statements other than those mentioned in Note 26 to the Financial Statements. Going Concerns The Directors have reviewed the Company s business plans and are satisfied that the Company has adequate resources to continue as a going concern for the foreseeable future. As such, the financial statements have been prepared on that basis. Statutory Payments The declaration relating to Statutory Payments is made in the Statement of Directors Responsibilities on page 11. Interests Register Details of the transactions with Director-related entities are disclosed in Note 27 to the financial statements on page 49, and have been declared at the Board meeting, pursuant to Section 192 (2) of the Companies Act No. 7 of 2007.

8 6 MERCANTILE SHIPPING COMPANY PLC Annual Report of the Board of Directors on the Affairs of the Company (Contd...) BOARD COMMITTEES Audit Committee Following are the names of the Directors comprising the Audit Committee of the Board. 1. T. N. Jayasinghe (Chairman) 2. C. P. P. G. Hapudeniya 3. G.M. Vikum Pradeepa (resigned w.e.f ) 4. Capt. R.E.G. Codipilly (appointed w.e.f ) 5. M.S.P. Gunawardena (appointed w.e.f ) Details are given under Corporate Governance on pages 10 to 14. Remuneration Committee Following are the names of the Directors comprising the Remuneration Committee of the Board. 1. C. P. P. G. Hapudeniya (Chairman) 2. T. N. Jayasinghe 3. Capt. R.E.G. Codipilly 4. M.S.P. Gunawardena Details are given under Corporate Governance on page 11. Related Party Transaction Review Committee Following are the names of the Directors comprising the Related Party Transaction Review Committee 1. T.N. Jayasinghe (Chairman) 2. C.P.P.G. Hapudeniya 3. M.S.P. Gunawardena Share Information and Substantial Shareholdings The distribution of shareholding market value of shares and Twenty largest Shareholders are given in pages 53 to 55. The earnings per share, dividends per share, net assets per share are given in Financial Highlights on page 56 of this Annual Report. Directors The Directors of the Company as at 31st March 2016 and their brief profiles are given on pages 8 to 9 in this report. During the year under review the Board met on 04 occasions. The attendance at these meetings was Name of Director Attendance A.N.U. Jayawardena 04/04 H.A.R.K. Wickramatileka 04/04 Capt. K. Kriwat 04/04 T. Kriwat 04/04 T.N. Jayasinghe 04/04 C.P.P.G. Hapudeniya 02/04 G.M. Vikum Pradeepa 03/04 (Mrs) K.A.C. Wilson 00/04 I.A.H. Esufally 00/04 S. M. D. N. Dharmapriya 03/04 During the year the following changes took place in the Directorate. Mr. A.N.U. Jayawardena resigned on 18th February 2016 and Mr. H.A.R.K. Wickramatileka was appointed as the Acting Chairman w.e.f. 01st April Mr. I.A.H. Esufally and Mrs. K.A.C. Wilson resigned on 17th August In accordance with Section 210 of the Companies Act No 7 of 2007, Captain K Kriwat who has reached the age of 75 and Mr. T.N. Jayasinghe who has reached the age of 72 retire and being eligible have offered themselves for re-election. Directors Shareholding The interest of the Directors in the shares of the Company as at 31st March were as follows; No. of Ordinary No. of Ordinary Shares as at Shares as at Mr. A.N.U. Jayawardena Mr. H. A. R. K. Wickramatileka 11,414 11,414 Independence of Directors In accordance with Rule of Colombo Stock Exchange Rules on Corporate Governance ( CSECG Rules ), A.N.U. Jayawardena Capt. K. Kriwat H.A.R.K. Wickramatileka T.N. Jayasinghe C.P.P.G. Hapudeniya G.M.Vikum Pradeepa M.S.P. Gunawardena S.M.D.N. Dharmapriya who are Non-Executive Directors of the Company, have submitted a signed and dated declaration to the Board of their Independence. Donations There were no donations made during the year.

9 MERCANTILE SHIPPING COMPANY PLC 7 Annual Report of the Board of Directors on the Affairs of the Company (Contd...) Auditors The resolutions to appoint the present Auditors, Messrs. Ernst & Young Chartered Accountant, who have expressed their willingness to continue in office, will be proposed at the Annual General Meeting. The following payments were made to them during the year: - Company Group Rs. Rs. Audit Fees 413,560 1,235,648 Fees for other Services 197, ,622 (Tax related work) As far as the Directors are aware, the Auditors do not have any relationship on interest in the Company. The Audit committee reviews the appointment of the Auditors, its effectiveness and its relationship with the Company including the level of audit and non-audit fees paid to the Auditor. Details on the work of the Audit Committee are set out under Corporate Governance. Notice of Meeting The Annual General Meeting will be held on 23rd September 2016 at a.m. at Park Premier Hall, Excel World, No. 330, T.B. Jayah Mawatha, Colombo 10. The Notice of the Annual General Meeting appears on page 03. For and on behalf of the Board. Mr. H.A.R.K. Wickramatileka / Acting Chairman (Mrs.) C.D.A. Peiris / Director Managers & Secretaries (Pvt) Ltd Secretaries 19th August 2016 Colombo

10 8 MERCANTILE SHIPPING COMPANY PLC Directors Profiles H A R K Wickramatileka Fellow Member of the Institute of Chartered Accountants of Sri Lanka B.Sc. (Public Administration) Postgraduate Diploma in Professional Shipping, Norwegian Shipping Academy, Oslo, Norway Appointed to the Mercantile Shipping Company PLC Board in May Held the position of Director Finance for over 15 years and presently serving as the Acting Chairman of the Company. He is a Director and Chairman of the Audit Committee Chairman of Colombo Dockyard PLC and also a Director of several other companies. He is the Chairman of Mercantile Emerald Shipping (Pvt) Ltd, Mercantile Marine Management Ltd., Royali Power (Pvt) Ltd and Royali Homes and Lands (Pvt) Ltd. C P P G Hapudeniya Associate of the Chartered Institute of Management Accountants, U.K, Chartered Global Management Accountant (CGMA) Appointed to the Mercantile Shipping Company PLC Board in November 2006 with a wealth of experience in Private Sector as an entrepreneur and presently serving as the Deputy Chairman of the Company. He is also the Chairman of the Remuneration Committee and a member of the Audit Committee and Related Party Transactions Review Committee of the Company. He is the Founder Chairman and Managing Director of International Paper Products (Pvt) Ltd and counts for over 22 years of experience in the corrugated carton industry. T. Kriwat Solicitor at Law in Germany Appointed to the Mercantile Shipping Company PLC Board in October He is the Managing Director of both Mercantile Shipping Company PLC and Reederei Eugen Friederich, Germany, the main shareholder of the Company at present. He is also a Director of number of shipping companies in Germany with more than 16 years of experience in Shipping and Ship Management. Capt. K. Kriwat Master Mariner Founder Director of Mercantile Shipping Company PLC and was the Deputy Chairman of the Company. His career extends to more than 50 years at sea and on shore with a wealth of experience in Shipping and Ship Management. T N Jayasinghe Fellow of the Chartered Institute of Management Accountants, U.K. Appointed to the Mercantile Shipping Company PLC Board in November He is the Chairman of the Audit Committee and the Related Party Transactions Review Committee and a member of the Remuneration Committee. He is a Director of Union Chemicals Lanka PLC and Chairman of the Audit Committee of that Company. Managing Director of Premier Managements Ltd and Director of several other companies. S M D N Dharmapriya Bachelor of Science, University of Sri Jayawardenapura, Sri Lanka Masters Degree in Maritime Studies, University of Wales, College of Cardiff, U.K. Member, Chartered Institute of Logistics & Transport, Sri Lanka. Appointed to the Mercantile Shipping Company PLC Board in March, Presently he functions as the General Manager of Ceylon Shipping Corporation Ltd (CSCL). He has a continuous carrier record of over 32 years in the shipping industry including his experience as the Country Representative of CSCL in India. He also serves on the Boards of Ceylon Shipping Agency (Pte) Ltd., Singapore, Sri Lanka Port Management & Consultancy Services (Pvt) Ltd. and Ceylon Shipping Lines Ltd.

11 MERCANTILE SHIPPING COMPANY PLC 9 Directors Profiles (Contd...) (Mrs) C.D.A. Peiris Fellow Member of the Chartered Institute of Management Accountants (FCMA) UK, Chartered Global Management Accountant (CGMA) Appointed to the Mercantile Shipping Company PLC Board in April She possesses a combination of financial expertise in commercial and non-commercial organizations with a service record of over 35 years. Presently serving as Director in the Boards of Mercantile Marine Management Ltd and Mercantile Seamen Training Institute Ltd. She serves in the Boards of several other non -commercial organizations. Capt. R.E.G Codipilly Master Mariner Holder of Masters FG Certification from the Commonwealth of Australia Appointed to the Mercantile Shipping Company PLC Board in May His career extends more than 35 years both at sea and on shore with experience in shipping, ship management and seafarer training. He is the Director/ General Manager of Mercantile Marine Management Limited, the largest ship management company in Sri Lanka. He is also the Managing Director of Mercantile Seamen Training Institute Ltd (MSTI) and Asia Marine Colombo (Pvt) Ltd. He is the Country Representative of the International Maritime Employers Council (IMEC)- London and the Trustee of the National Union of Seafarers Trust of Sri Lanka. M.S.P. Gunawardena Attorney at Law of the Supreme Court of Sri Lanka and Notary Public LLB, University of Colombo Postgraduate Diploma in Professional Shipping, Norwegian Shipping Academy, Oslo, Norway Postgraduate Diploma in Maritime Law and Insurance, Oslo, Norway Appointed to the Mercantile Shipping Company PLC Board in May 2016 with over 30 years of experience in the shipping trade with an expertise in Maritime Law and Insurance. Joined Ceylon Shipping Corporation as a Management Trainee and elevated to the post of General Manager through ranks and worked over 10 years in that capacity. Presently a practicing lawyer in Colombo.

12 10 MERCANTILE SHIPPING COMPANY PLC Corporate Governance DIRECTOR S RESPONSIBILITIES The Board of Directors is responsible for setting up a policy framework for Good Governance Practice to protect and enhance the shareholders value for the Company The Company applies the Code of Best Practice issued by the Institute of Chartered Accountants of Sri Lanka and complies with the requirements of the Securities Exchange Commission of Sri Lanka and the Colombo Stock Exchange. The responsibilities of the Directors are to exercise in their best judgment what they reasonably believe to be in the best interest of the Company for the creating of long term value for the shareholders. The Board has taken necessary steps to ensure that the Management discharges its duties responsibly and efficiently to meet the above criteria. Board of Directors The present Board consists of ten Directors, nine of whom are non-executive Directors in compliance with Rule (a) and out of the non-executive Directors four are Independent Directors in compliance with Rule (a) of CSE s Listing Rules. All the Non-executive Directors have submitted a signed declaration of Independence in compliance with the Rule (b) of CSE s Listing Rules. Director Position held on the Board Date of Appointment to Nature of Appointment the Board A.N.U. Jayawardena Chairman (resigned w.e.f ) 17 th March 1981 Non-executive Director H. A. R. K. Wickramatileka Acting Chairman (w.e.f ) 13 th May 1991 Non-executive Director C. P. P. G. Hapudeniya Deputy Chairman 30 th November 2006 Non-executive Independent Director Capt. K. Kriwat Director 17 th March 1981 Non-executive Director T. Kriwat Managing Director 16 th October 2000 Executive Director T. N. Jayasinghe Director 30 th November 2006 Non-executive Independent Director I. A. H. Esufally Director 22 nd January 2009 Non-executive Director (resigned w.e.f ) G. M. Vikum Pradeepa Director 29 th July 2010 Non-executive Independent Director (resigned w.e.f ) (Mrs) K. A. C. Wilson Director 9 th November 2011 Non-executive Director (resigned w.e.f ) S. M. D. N. Dharmapriya Director 23 rd March 2015 Non-executive Independent Director (Mrs) C. D. A. Peiris Director 1 st April 2016 Executive Director Capt. R. E. G. Codipilly Director 13 th May 2016 Non-executive Director M. S. P. Gunawardena Director 13 th May 2016 Non-executive Independent Director The Board established two sub-committees namely the Audit Committee and the Remuneration Committee. AUDIT COMMITTEE The Audit Committee consists of three non-executive independent Directors in compliance to Rule (a) of the Colombo Stock Exchange. Director Position held No. of Meetings held T. N. Jayasinghe Chairman C. P. P. G. Hapudeniya Member 06 G. M. Vikum Pradeepa Member

13 MERCANTILE SHIPPING COMPANY PLC 11 Corporate Governance (Contd...) Independence of the Members of the Committees Mr. T N Jayasinghe is a Fellow of the Chartered Institute of Management Accountants, UK with over 40 years experience in the Private Sector locally and abroad and is independent as per the criteria set out by the Colombo Stock Exchange. Mr. C P P G Hapudeniya is an Associate of the Chartered Institute of Management Accountants, UK with a wealth of experience in Private Sector as an entrepreneur and is independent as per the criteria set out by the Colombo Stock Exchange. Mr. G M Vikum Pradeepa holds a Bachelor of Commerce (Special) Degree from University of Sri Jayewardenepura and Master Degree in Shipping Management from World Maritime University, Malmo, Sweden. He is the Finance Manager of Ceylon Shipping Corporation Ltd with more than 15 years experience in shipping. The role of the Audit Committee is to assist the Board in the discharge of its duties by ensuring that the Company follows adequate system of internal controls to minimize risk and errors, prepare financial statements in accordance with Sri Lanka Accounting Standards and comply with directions issued by the Regulatory Authorities and the laws of the land. The Committee met six times during the year assisted by the Chief Financial Officer The Committee also met with the External Auditors and reported their findings and recommendations to the Board regularly. REMUNERATION COMMITTEE The Remuneration Committee consists of two Non-executive independent Directors in compliance to Rule (a) of the Colombo Stock Exchange. Director Position held No. of Meeting held C. P. P. G. Hapudeniya Chairman No meetings held during the T. N. Jayasinghe Member period as there were no changes in remunerations. The Remuneration Committee recommends the remuneration payable to the Executive Director based on relevant criteria. The Board makes the final determination after consideration of such recommendation. STATUTORY PAYMENTS All statutory payments have been made by the Company. DISCLOSURE OF REMUNERATION The total of Directors Remuneration is reported in Note 28 to the Financial Statements in accordance with Rule 6.6(b) of the Colombo Stock Exchange.

14 12 MERCANTILE SHIPPING COMPANY PLC Corporate Governance (Contd...) LEVEL OF COMPLIANCE WITH THE CSE S LISTING RULES Level of compliance with the CSE s Listing Ruling section 6, Rules on Corporate Governance are given in the following table Rule No. Subject Applicable requirement Compliance Status Non-Executive Directors At least one third of the total number Compliant of Directors should be Non-executive Directors (a) Independent Directors Two or one third of Non-executive Compliant Directors, whichever is higher should be independent (b) Independent Directors Each Non-executive Director should Compliant submit a declaration of independence/ non-independence in the prescribed format (a) Disclosure relating to Directors (b) Disclosure relating to Directors (c) Disclosure relating to Directors (d) Disclosure relating to Directors Remuneration Committee (a) Composition of Remuneration Committee (b) Functions of Remuneration Committee (c) Disclosure in the Annual Report relating to Remuneration Committee Names of independent Directors should Compliant be disclosed in the Annual Report The basis for the Board to determine a Compliant Director as independent, as specified in criteria for independence is not met A brief resume of each Director should Compliant be included in the Annual Report including the areas of expertise. Forthwith provide a brief resume of Compliant new Directors appointed to the Board with details specified in (d) to the Exchange A listed company shall have a Compliant Remuneration Committee Shall comprise of Non-executive Compliant Directors a majority of whom will be independent The Remuneration Committee shall Compliant recommend the remuneration of Chief Executive Officer and Executive Directors The Annual Report should set out; a) Names of directors comprising the Compliant Remuneration Committee b) Statement of Remuneration Policy Compliant c) Aggregated remuneration paid Compliant to Executive and Non-executive Directors Details Seven of the Nine Directors are Non-Executive Directors Four of the seven Non- Executive Directors are Independent Non-executive Directors have submitted the declaration. Given in page 10 under the heading Board of Directors Given in page 10 under the heading Board of Directors Given in pages 8 to 9 under heading Directors Profiles Given in pages 8 to 9 under heading Directors Profiles Remuneration Committee in place. Please refer page 11 Both Directors are independent As above and stated in this Report Please refer page 11

15 MERCANTILE SHIPPING COMPANY PLC 13 Corporate Governance (Contd...) Rule No. Subject Applicable requirement Compliance Status Audit Committee The company shall have an Audit Compliant Committee (a) Composition of Audit Committee (b) Audit Committee Functions (c) Disclosure in the Annual Report relating to Audit Committee Shall comprise of Non-executive Directors a majority of whom will be independent Non-executive Director shall be appointed as the Chairman of the Committee The Chief Executive Officer and Chief Financial Officer should attend Audit Committee Meetings The Chairman of the Audit Committee or one member should be a member of a professional accounting body Should be as outlined in the Section 7 of the Listing Rules a) Names of Directors comprising the Audit Committee b) The Audit Committee shall make a determination of the independence of the Auditors and disclose for such determination c) The Annual Report shall contain a Report of the Audit Committee setting out of the manner of Compliance of the functions Compliant Compliant Compliant Compliant Compliant Compliant Compliant Compliant Details Given in page 10 under the heading Audit Committee As above As above As above As above As above As above and given in this report As above As above

16 14 MERCANTILE SHIPPING COMPANY PLC Audit Committee Report The Audit Committee, which has been appointed by the Board comprises presently of three Non-Executive Independent Directors and one Non-Executive Non-Independent Director and has been empowered to examine any matters relating to the financial affairs of the Company. These include review of the quarterly and annual financial statements with Sri Lanka Accounting Standards and International Financial Reporting Standards, requirements of the Colombo Stock Exchange and any other related functions as may be directed by the Board. The Audit Committee met on 6 occasions during the year ended 31st March 2016 and was assisted by the Company s Chief Financial Officer The Committee reviewed the preparation, presentation and adequacy of disclosures in the Company s Quarterly and Annual Financial Statements and made their recommendations to the Board prior to the publication of these Financial Statements. The Committee Members have also discussed operational problems faced by the Management and is satisfied that all relevant matters have been taken into account in the preparation of the Financial Statements. The Committee also met and discussed with the Partner and Manager in charge of the Audit from Messrs. Ernst & Young before commencement of the audit process and again on completion of the audit to discuss all issues and resolve their treatment. The Audit Committee is satisfied that the independence of the External Auditors has not been impaired in anyway by any event or service that could give rise to a conflict of interest. The Audit Committee has recommended to the Board that the present Auditors, Messrs. Ernst & Young be appointed External Auditors for the year ending 31st March 2017, subject to approval of the shareholders at the Annual General Meeting. Tissa Jayasinghe Chairman Audit Committee 15th August 2016

17 MERCANTILE SHIPPING COMPANY PLC 15 Independent Auditors Report INDEPENDENT AUDITORS REPORT TO THE SHAREHOLDERS OF MERCANTILE SHIPPING COMPANY PLC Report on the Financial Statements We have audited the accompanying financial statements of Mercantile Shipping Company PLC, ( the Company ), and the consolidated financial statements of the Company and its subsidiaries (the Group ), which comprise the Statement of financial position as at 31 March 2016, and the statement of profit or loss and other comprehensive income, statement of changes in equity and, statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Board s Responsibility for the Financial Statements The Board of Directors ( Board ) is responsible for the preparation of these financial statements that give a true and fair view in accordance with Sri Lanka Accounting Standards, and for such internal control as Board determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility 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 comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation of the financial statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by Board, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements give a true and fair view of the financial position of the Group as at 31 March 2016, and of its financial performance and cash flows for the year then ended in accordance with Sri Lanka Accounting Standards. Emphasis of Matter Without qualifying our opinion, we draw attention to Note 2.4 Going Concern and 24.2 Corporate Guarantee in the financial statements which indicate the existence of a material uncertainty that may cast significant doubt on the Company and Group s ability to continue as a going concern and, therefore, that it may be unable to realize its assets and discharge its liabilities in the normal course of business. The Group has incurred a Net Loss of Rs. 721 million (2015 Rs. 349 million) for the year ended 31 March As at reporting date the Group s Current Liabilities exceeded Current Assets by Rs. 3,192 million (2015- Rs. 67 million). Further the Group s Net Asset position has become a negative of Rs. 1,112 million (2015- Rs. 321 million) as of the reporting date. The above group financial position and results are mainly due to the financial performance and conditions of Mercantile Emerald Shipping (Private) Limited which is a fully owned subsidiary of the Company.

18 16 MERCANTILE SHIPPING COMPANY PLC Independent Auditors Report (Contd...) Mercantile Emerald Shipping (Private) Limited has defaulted payment of capital in respect of the loan borrowed from Bremer Landesbank Germany. Further, Mercantile Shipping Company PLC has unconditionally and irrevocably guaranteed to Bremer LandesBank to meet and fulfil all its obligations under the respective loan agreement with the bank in relation to Mercantile Emerald Shipping (Private) Limited. Mercantile Emerald Shipping (Private) Limited had received a letter dated 31 March 2016 from Bremer Landesbank - Germany informing that the unpaid instalments of the loan are being tolerated by the bank until further notice, latest until 30 April In a subsequent letter dated 09 August 2016 sent by Bremer Landesbank Germany, the Bank has mentioned that the Bank reserves all rights under the post delivery financing facility. However, up-to-date, no further actions has been taken by the Bank in this regard. Considering the factors enumerated below, along with other mitigating plans as set out under Note 2.3, we have concluded that the likelihood of immediate foreclosure of vessels mortgaged over the loans borrowed by Mercantile Emerald Shipping (Private) Limited is remote. Bremer Landesbank has granted an overdraft facility of USD 340,879 during the year to Mercantile Emerald Shipping (Private) Limited. The Bank has also acknowledged that the shipping segment as a whole continues to face significant difficulties due to falling growth rates in the emerging economies and existing surplus of transport capacity. External sources indicate that the over supply of vessels in the market would be reduced since a significant amount of vessels are due on retirement in next few years. Report on Other Legal and Regulatory Requirements As required by section 163 (2) of the Companies Act No. 07 of 2007, we state the following: a) The basis of opinion and scope and limitations of the audit are as stated above. b) In our opinion: we have obtained all the information and explanations that were required for the audit and, as far as appears from our examination, proper accounting records have been kept by the Company, the financial statements of the Company give a true and fair view of its financial position as at 31 March 2016, and of its financial performance and cash flows for the year then ended in accordance with Sri Lanka Accounting Standards, and the financial statements of the Company and Group, comply with the requirements of section 151 and 153 of the Companies Act No. 7 of Without qualifying our opinion, we draw attention to Note Corporate guarantee in the financial statements. 19th August 2016 Colombo

19 MERCANTILE SHIPPING COMPANY PLC 17 Statement of Profit or Loss and Other Comprehensive Income Year ended 31st March Group Company Note Rs. Rs. Rs. Rs. Revenue 5 537,083, ,958,652 19,583,296 18,642,294 Cost of Sales (507,638,675) (539,741,562) - - Gross Profit 29,444,912 21,217,090 19,583,296 18,642,294 Other Income 6 130,304, ,082 45,701, ,240 Selling and Marketing Expenses (410,891) (274,635) (410,891) (274,635) Administrative Expenses (31,193,275) (246,252,741) (31,106,103) (21,774,157) Impairment of Non-Current Assets 7 (755,342,500) - - (258,052,870) Operating Profit/(Loss) (627,197,743) (224,759,204) 33,768,000 (261,340,127) Finance Cost 8.1 (95,200,609) (99,322,614) (3,572,838) (4,699,241) Finance Income 8.2 2,224, ,752 2,224, ,752 Share of Loss of Joint Venture ( Net of Tax ) - (30,881,585) - - Profit/(Loss) before Tax 10 (720,173,591) (354,182,651) 32,419,400 (265,258,615) Income Tax (Expense) / Reversal 11 (727,337) 5,224,731 (727,337) 5,224,731 Profit/(Loss) for the Year (720,900,928) (348,957,920) 31,692,062 (260,033,884) Other Comprehensive Income Other comprehensive income to be reclassified to profit or loss in subsequent periods Exchange Differences on Translation of Foreign Operations (69,962,437) 58,501, Other comprehensive income/(loss) for the year, net of tax (69,962,437) 58,501, Total Comprehensive Income /(Loss) for the year, net of tax (790,863,365) (290,456,430) 31,692,062 (260,033,884) Profit /(Loss) attributable to Equity holders of the parent (720,900,928) (348,957,920) 31,692,062 (260,033,884) Total comprehensive income/(loss) attributable to Equity holders of the parent (790,863,365) (290,456,430) 31,692,062 (260,033,884) Basic/Diluted Earnings/(Loss) per Share 12 (253.39) (122.66) (91.40) The Accounting Policies and Notes on pages 21 through 52 form an integral part of these Financial Statements.

20 18 MERCANTILE SHIPPING COMPANY PLC Statement of Financial Position Group Company As at 31 March 31 March 31 March 31 March Note Rs. Rs. Rs. Rs. ASSETS Non-Current Assets Property, Plant and Equipment 13 2,042,194,653 2,662,017,410 6,572,644 9,641,700 Investment Property 14 64,846,099 68,887,736 64,846,099 68,887,736 Investments in Subsidiaries ,000,000 15,000,000 Other Non-Current Financial Assets ,297,630 1,297,630 1,297,630 1,297,630 2,108,338,382 2,732,202,776 87,716,373 94,827,066 Current Assets Inventories 17 18,232,055 6,431, Trade and Other Receivables 18 70,122,417 15,089,654 16,186,660 25,075,885 Advances and Prepayments 9,566,838 10,033,828 1,767,380 1,161,786 Income Tax Recoverable 3,675,098 10,571, ,557 Other Current Financial Assets ,373,972 13,501,210 42,373,972 13,829,578 Cash and Cash Equivalents 19 12,296,422 37,397,744 6,309,430 1,879, ,266,802 93,025,807 66,637,442 42,208,159 Total Assets 2,264,605,184 2,825,228, ,353, ,035,225 EQUITY AND LIABILITIES Capital and Reserves Stated Capital 20 37,262,606 37,262,606 37,262,606 37,262,606 Foreign Currency Translation Reserve (6,423,075) 63,539, Retained Earnings/(Losses) (1,143,084,013) (422,183,085) 35,435,230 3,743,168 Total Equity (1,112,244,482) (321,381,117) 72,697,836 41,005,774 Non-Current Liabilities Interest Bearing Loans and Borrowings 21 26,100,000 2,984,585,142 26,100,000 31,300,000 Retirement Benefit Liability , , Deferred Tax Liability ,553,109 1,230,584 1,553,109 1,230,584 28,351,721 2,986,322,500 27,653,109 32,530,584 Current Liabilities Other Payable 23 60,886,461 53,941,779 47,602,311 48,614,302 Interest Bearing Loans and Borrowings 21 3,286,247, ,125,069 6,257,305 14,884,565 Income Tax Payable 1,363,604 1,220, ,254-3,348,497, ,287,200 54,002,870 63,498,867 Total Equity and Liabilities 2,264,605,184 2,825,228, ,353, ,035,225 Net Assets/(Liability) per Share (390.95) (112.96) These Financial Statements are in compliance with the requirements of the Companies Act No. 7 of Chief Financial Officer The Board of Directors is responsible for the preparation and presentation of these Financial Statements. Signed for and on behalf of the Board by; Acting Chairman Director The Accounting Policies and Notes on pages 21 through 52 form an integral part of these Financial Statements. 19th August 2016 Colombo

21 MERCANTILE SHIPPING COMPANY PLC 19 Statement of Changes in Equity Group Stated Foreign Retained Total Capital Currency Earnings Equity Translation /(Losses) Reserve Balance as at 01 April ,262,606 5,037,872 (73,225,165) (30,924,687) Loss for the year - - (348,957,920) (348,957,920) Other Comprehensive Income - 58,501,490-58,501,490 Total Comprehensive Income/(Loss) - 58,501,490 (348,957,920) (290,456,429) Balance as at 31 March ,262,606 63,539,362 (422,183,085) (321,381,116) Loss for the year - - (720,900,928) (720,900,928) Other Comprehensive Income/(Loss) - (69,962,437) - (69,962,437) Total Comprehensive Income/(Loss) - (69,962,437) (720,900,928) (790,863,365) Balance as at 31 March ,262,606 (6,423,075) (1,143,084,013) (1,112,244,482) Company Stated Retained Total Capital Earnings Equity Rs. Rs. Rs. Balance as at 01 April ,262, ,777, ,039,658 Loss for the year - (260,033,884) (260,033,884) Other Comprehensive Income Total Comprehensive Income - (260,033,884) (260,033,884) Balance as at 31 March ,262,606 3,743,168 41,005,774 Loss for the year - 31,692,062 31,692,062 Other Comprehensive Income Total Comprehensive Income - 31,692,062 31,692,062 Balance as at 31 March ,262,606 35,435,230 72,697,836 The Accounting Policies and Notes on pages 21 through 52 form an integral part of these Financial Statements.

22 20 MERCANTILE SHIPPING COMPANY PLC Statement of Cash Flow Group Company Note Rs. Rs. Rs. Rs. Cash Flows from/(used in) Operating Activities Profit/(Loss) before Tax (720,173,591) (354,182,651) 32,419,400 (265,258,615) Adjustment For Depreciation ,325, ,610,000 7,285,683 7,880,602 Profit on Disposal of Property, Plant and Equipment 6 (53,000) (62,500) (53,000) (62,500) Fair value adjustment of investments - (122,451) - (122,451) Provision for Defined Benefit Obligation , , Finance Cost ,200,609 99,322,614 3,572,838 4,699,241 Finance Income 8.2 (2,224,239) (658,301) (2,224,239) (658,301) Share of Loss of Investment in Joint Venture 9-20,406, Impairment of investments ,052,869 Write off - amount due from H&M shipping C/A ,345,601 - Impairment of Vessels 755,342, Exchange (Gain)/Loss 6 (84,353,673) 219,915, Provision for Long Outstanding Tax Recoverables 6,634, Operating Profit/(Loss) before Working Capital Changes 175,830, ,374,324 51,346,283 4,530,845 (Increase)/Decrease in Inventories (11,800,151) 2,095, (Increase)/Decrease in Trade and Other Receivables (55,032,764) 2,528,011 (1,456,375) (7,786,588) (Increase)/Decrease in Advance and Prepayment 466,989 1,393,419 (605,595) (443,354) Increase/(Decrease) in Trade and Other Payables 6,944,590 (399,476) (1,011,994) 619,560 Cash Generated from/(used in) Operations 116,409, ,991,873 48,272,319 (3,079,537) Finance Cost Paid (95,140,776) (102,245,017) (3,513,005) (4,411,441) Tax Paid - (381,368) - (381,368) Net Cash from/(used in) Operating Activities 21,268,516 19,365,488 44,759,314 (7,872,346) Cash Flows from/(used in) Investing Activities Acquisition of Property, Plant and Equipment 13 (174,990) (22,000) (174,990) (22,000) Proceeds from Disposal of Property, Plant and Equipment 53,000 62,500 53,000 62,500 Acquisition of Investment Property Finance Income Received , , , ,923 Investment in Fixed Deposits (26,875,797) (402,923) (26,875,797) (402,923) Net Cash from/(used in) Investing Activities (26,501,978) 40,500 (26,501,978) 40,500 Cash Flows from/(used in) Financing Activities Repayment of Interest Bearing Loans and Borrowings (147,333,372) (66,036,290) (4,031,866) (2,750,000) Net Cash from/(used in) Financing Activities (147,333,372) (66,036,290) (4,031,866) (2,750,000) Effect of Exchange Rate Changes 88,083,049 (4,986,258) - - Net Increase/(Decrease) in Cash and Cash Equivalents (64,812,062) (51,616,561) 14,225,471 (10,581,846) Cash and Cash Equivalents at the beginning of the year 27,250,979 78,867,540 (8,267,412) 2,314,434 Cash and Cash Equivalents at the end of the year 19 (37,561,083) 27,250,979 5,958,059 (8,267,412) The Accounting Policies and Notes on pages 21 through 52 form an integral part of these Financial Statements.

23 MERCANTILE SHIPPING COMPANY PLC 21 Notes to the Financial Statements 1. CORPORATE INFORMATION 1.1 General Mercantile Shipping Company PLC ( Company ) is a Public Limited Liability Company, incorporated and domiciled in Sri Lanka and listed on the Colombo Stock Exchange. The registered office and the principal place of business are located at No.108, Aluthmawatha Road, Colombo 15. The Consolidated Financial Statements of Mercantile Shipping Company PLC for the year ended 31 March 2016 comprises of the Company and its subsidiaries, Mercantile Global Shipping Limited and Mercantile Emerald Shipping (Private) Limited. 1.2 Principal Activities and Nature of Operations During the year, the principal activities of the Group were as follows: Mercantile Shipping Company PLC During the year, the principal activities of the Company were carrying out investment activities and management services to its subsidiaries which are in the shipping industry. The Company also carried out renting of investment properties during the year. Mercantile Emerald Shipping (Private) Limited The Company is principally engaged in owning and chartering of ocean going vessels. Mercantile Global Shipping Limited Not in operations and awaiting tax clearance for closure. 1.3 Date of Authorization for Issue The Financial Statements of Mercantile Shipping Company PLC for the year ended 31 March 2016 were authorized for issue in accordance with a resolution of the Board of Directors on 19th August GENERAL POLICIES 2.1 Statement of Compliance The Financial Statements which comprise of the Statements of Financial Position, Statements of Profit or Loss and other Comprehensive Income, Statements of Changes in Equity, Statements of Cash Flows together with accounting policies and notes have been prepared in accordance with the Sri Lanka Accounting Standards ( SLFRS ) as issued by the Institute of Chartered Accountants of Sri Lanka. The preparation and presentation of these Consolidate Financial Statements are in compliance with the requirements of the Companies Act No.07 of Basis of preparation The Financial Statements have been prepared on a historical cost basis, except for financial instruments measured at fair value through profit or loss and available-for-sale financial assets that have been measured at fair value. The Financial Statements of Mercantile Global Shipping Limited has been prepared other than on a going concern basis and the assets and liabilities are recorded at their realisable amounts. 2.3 Functional and presentation currency The Financial Statements are presented in Sri Lankan Rupees which is the Company s functional and presentation currency, except when otherwise indicated. For each entity the Group determines the functional currency and items included in the financial statements of each entity are measured using that functional currency. 2.4 Going Concern The consolidated financial statements have been prepared on a going concern basis taking into consideration of the financial statements of the group companies other than the financial statements of Mercantile Global Shipping Limited. The Financial Statements of Mercantile Global Shipping Limited has been prepared other than on a going concern basis and the assets and liabilities are recorded at their realisable amounts. The Group has incurred a Net Loss of Rs. 721 million ( Rs. 349 million) for the year ended 31 March As at reporting date the Group s Current Liabilities exceeded Current Assets by Rs. 3,192 million (2015- Rs. 67 million). Further the Group s Net Asset position has become a negative of Rs. 1,112 million (2015- Rs million) as of the reporting date. The above group financial results are mainly due to the financial performance and conditions of Mercantile Emerald Shipping (Private) Limited (MESL) which is a fully owned subsidiary of the Company, of which the details are given below: Mercantile Emerald Shipping (Private) Limited The Directors have made an assessment of the