HVA FOODS PLC -Prospectus

PROSPECTUS HVA FOODS LIMITED INITIAL PUBLIC OFFERING To be listed on the Diri Savi Board of the Colombo Stock Exchange

HELADIV TEAS. GIVING THE WORLD A TASTE OF SRI LANKA.

WWW.HELADIV.COM

For further inquiries please contact the Managers to the Offering

I N S P I R E D

B Y

I N N O V A T I O N

 

Offer for Subscription of Nineteen Million Nine Hundred and Twenty Eight Thousand Five Hundred and Ninety Eight (19,928,598) Ordinary Voting Shares at LKR 16 per share Please note that upon the allotment of shares under this Offer, THE ALLOTTED SHARES WOULD BE CREDITED TO THE APPLICANT’S CDS ACCOUNT. If you wish to open a CDS account, you may do so through any one of the Members and Trading Members of the CSE as set out in Annexure C or through any one of the Custodian Banks as set out in Annexure E.

The delivery of this Prospectus shall not under any circumstance constitute a representation or create any implication or suggestion that there has been no material change in the affairs of the Company since the date of this Prospectus. If you are in doubt regarding the contents of this document or if you require any advice in this regard, you should consult your Stock Broker, Bank Manager, Lawyer or any other Professional Advisor.

This Prospectus is dated 03rd January 2011

The Colombo Stock Exchange (“CSE”) has taken reasonable care to ensure full and fair disclosure of information in this Prospectus. However, the CSE assumes no responsibility for the accuracy of the statements made, opinions expressed or reports included in the Prospectus. Moreover, the CSE does not regulate the pricing of the shares, which is decided solely by the Company/Issuer.

This Prospectus has been prepared by Acuity Partners (Private) Limited (“Acuity”) on behalf of HVA Foods Limited (“the Company”) from the information supplied by the Company and its Directors and/ or which is publicly available. The Company and its Directors having made all reasonable inquiries, confirm that to the best of their knowledge and belief the information contained herein is true and correct in all material respects and that there are no other material facts, the omission of which would make any statement herein misleading. While Acuity has taken reasonable care to ensure full and fair disclosure, Acuity does not assume responsibility for any investment decision made by the investors based on the information contained herein. In making an investment decision, prospective investors must rely on their own examination and assessments of the Company, including the risks involved. No person is authorized to give any information or make representation not contained in this Prospectus and if given or made, any such information or representation must not be relied upon as having been authorized by Acuity.

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| HVA Foods Limited – Initial Public Offering

REGISTRATION OF THE PROSPECTUS A copy of this Prospectus has been delivered to the Registrar of Companies of Sri Lanka for registration. The following documents were attached to the copy of the Prospectus delivered to the Registrar of Companies.

à The written consent of the Managers to the Issue

The Managers to the Issue have given and have not before the delivery of a copy of the Prospectus for registration withdrawn their written consent for the inclusion of their name as Managers to the Issue and for the inclusion of their statements/declarations in the form in which it is included in the Prospectus.

à The written consent of the Registrars to the Issue

The Registrars to the Issue have given and have not before the delivery of a copy of the Prospectus for registration withdrawn their written consent for the inclusion of their name as Registrars to the Issue in the Prospectus.

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

The Auditors & Reporting Accountants to the Company have given and have not before the delivery of a copy of the Prospectus for registration withdrawn their written consent for the inclusion of their name as Auditors & Reporting Accountants to the Company and for the inclusion of their report/statements in the form and context in which it is included in the Prospectus.

à The written consent of the Lawyers to the Company

The Lawyers to the Company have given and have not before the delivery of a copy of the Prospectus for registration withdrawn their written consent for the inclusion of their name as Lawyers to the Company in the Prospectus.

à The written consent of the Bankers to the Issue

The Bankers to the Issue have given and have not before the delivery of a copy of the Prospectus for registration withdrawn their written consent for the inclusion of their names as Bankers to the Company and the Bankers to the Issue in the Prospectus. A declaration has been made by each of the Directors of the Company confirming that each of them have read the provisions of the Companies Act relating to the Issue of the Prospectus and that those provisions have been complied with.

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REPRESENTATION No person is authorized to give any information or make any representation not contained in this Prospectus and if given or made, any such information or representation must not be relied upon as having been authorized by the Company.

REGISTRATION OF THE PROSPECTUS IN JURISDICTIONS OUTSIDE SRI LANKA This Prospectus has not been registered with any authority outside of Sri Lanka. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy, nor there be any sale of any shares offered herein, to any person in any circumstance or in any jurisdiction in which it is unlawful to make such an offer, solicitation or sale.

FORWARD LOOKING STATEMENTS Any statements included in this Prospectus that are not statements of historical fact constitute “Forward Looking Statements”. These can be identified by the use of forward looking terms such as “expect”, “anticipate”, “may”, “plan to”, “believe”, “could” and similar terms or variations of such terms. However, these words are not the exclusive means of identifying Forward Looking Statements. As such, all statements pertaining to expected financial position, business strategy, plans and prospects of the Company are classified as Forward Looking Statements. Such Forward Looking Statements involve known and unknown risks, uncertainties and other factors including but not limited to regulatory changes in the sectors in which the Company operates and its ability to respond to them, the Company’s ability to successfully adapt to technological changes, exposure to market risks, general economic and fiscal policies of Sri Lanka, inflationary pressures, the performance of financial markets both globally and locally, changes in domestic and foreign laws, regulation of taxes and changes in competition in the industry and further uncertainties that may or may not be in the control of the Company. Such factors may cause actual results, performance and achievements to materially differ from any future results, performance or achievements expressed or implied by Forward Looking Statements herein. Forward Looking Statements are also based on numerous assumptions regarding the Company’s present and future business strategies and the environment in which the Company will operate in the future. Given the risks and uncertainties that may cause the Company’s actual future results, performance or achievements to materially differ from that expected, expressed or implied by Forward Looking Statements in this Prospectus, investors are advised not to place sole reliance on such statements.

INVESTMENT CONSIDERATIONS It is important that this Prospectus is read carefully prior to making an investment decision. For information concerning certain risk factors, which should be considered by prospective investors, see “Investment Considerations and Associated Risk Factors” in Section 8.0 of this Prospectus.

PRESENTATON OF CURRENCY INFORMATION AND OTHER NUMERICAL DATA The financial statements of the Company and currency values of economic data or industry data in a local context will be expressed in Sri Lankan Rupees. References in the Prospectus to “LKR” are to the lawful currency of Sri Lanka. References to USD are to United States Dollars, the official currency of the United States of America. Certain numerical figures in the Prospectus have been subject to rounding adjustments; accordingly numerical figures shown as totals in certain tables may not be an arithmetic aggregation of the figures that precede them.

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Contents SALIENT FEATURES AT A GLANCE..................................................................................................................................................................................8 DEFINITIONS / INTERPRETATIONS..................................................................................................................................................................................9 1.0 CORPORATE INFORMATION.............................................................................................................................................................................. 10 2.0 RELEVANT PARTIES TO THE OFFERING........................................................................................................................................................... 11 3.0 DETAILS OF THE OFFERING................................................................................................................................................................................ 12 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 3.10

3.11

3.12 3.13 3.14 3.15 3.16 3.17 3.18

The Offering...................................................................................................................................................................................................................................12 Nature of the Offered Shares...............................................................................................................................................................................................12 Size of the Issue............................................................................................................................................................................................................................12 Offer Price........................................................................................................................................................................................................................................12 Objectives of the Offering.....................................................................................................................................................................................................12 Cost of the Offering...................................................................................................................................................................................................................13 Listing.................................................................................................................................................................................................................................................13 Subscription List and Closure Date..................................................................................................................................................................................13 Eligible Applicants......................................................................................................................................................................................................................14 Procedure for Applications...................................................................................................................................................................................................14 3.10.1 The Prospectus and Application Form..................................................................................................................................................14 3.10.2 Number of Shares Applied...........................................................................................................................................................................15 3.10.3 Identification Information.............................................................................................................................................................................15 3.10.4 Responsibility of a Non-Resident Investor..........................................................................................................................................16 3.10.5 Margin Trading.....................................................................................................................................................................................................16 3.10.6 Applications made under Power of Attorney .................................................................................................................................16 3.10.7 Joint Applications..............................................................................................................................................................................................16 3.10.8 Multiple Applications.......................................................................................................................................................................................16 3.10.9 Rejection of Applications..............................................................................................................................................................................17 3.10.10 Submission of Applications.........................................................................................................................................................................17 Payment of Application Monies........................................................................................................................................................................................17 3.11.1 Mode of Remittance.........................................................................................................................................................................................17 3.11.2 Cheques or Bank Drafts – Resident Sri Lankan Investors...........................................................................................................18 3.11.3 Bank Guarantees – Resident Sri Lankan Investors.........................................................................................................................18 3.11.4 Foreign Currency Remittance.....................................................................................................................................................................18 3.11.5 Restrictions Applicable to Foreign Citizens Resident in Sri Lanka.......................................................................................20 Banking of Payments................................................................................................................................................................................................................20 Returning of Monies of Rejected Applications........................................................................................................................................................20 The Basis of Allotment.............................................................................................................................................................................................................20 Refunds on Applications........................................................................................................................................................................................................21 Successful Applicants and CDS Lodgement ............................................................................................................................................................22 Transferability of Offered Shares........................................................................................................................................................................................22 Declaration to the Colombo Stock Exchange and Secondary Market Trading...................................................................................22

4.0 BUSINESS OPERATIONS OF HVA FOODS LIMITED..................................................................................................................................... 23 4.1 4.2

Group Structure...........................................................................................................................................................................................................................23 Products Offered .......................................................................................................................................................................................................................23 4.2.1 Value Added Tea Based Products.............................................................................................................................................................24 4.2.2 Tea Extract Based Products...........................................................................................................................................................................28 4.2.3 Tea Concentrate Based Products..............................................................................................................................................................29 4.2.4 Franchise Operation.........................................................................................................................................................................................30 4.2.5 Revenue Breakup of the Products Offered.........................................................................................................................................30

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4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11

Markets..............................................................................................................................................................................................................................................31 Competition...................................................................................................................................................................................................................................39 Degree of Dependence on Key Customers and Suppliers...............................................................................................................................40 Details of Material Indebtedness......................................................................................................................................................................................40 Working Capital............................................................................................................................................................................................................................41 Dividend Policy............................................................................................................................................................................................................................41 Litigation, disputes and contingent liabilities...........................................................................................................................................................41 Patents, Trade marks and Brands Owned by the Company ...........................................................................................................................42 Share Transfer of HVA Holdings (Private) Limited to HVA Foods Limited.................................................................................................42

5.0 TEA INDUSTRY . ..................................................................................................................................................................................................... 43 5.1 5.2 5.3 5.4 5.5 5.6

History................................................................................................................................................................................................................................................43 Overview – Contribution to the Economy.................................................................................................................................................................43 Overview – Sri Lanka Tea Production.............................................................................................................................................................................44 Tea Export Market.......................................................................................................................................................................................................................45 Regulatory Environment........................................................................................................................................................................................................46 Value Added Tea Exports........................................................................................................................................................................................................47

6.0 SRI LANKAN FAST MOVING CONSUMER GOODS INDUSTRY (FMCG)................................................................................................. 49 6.1 6.2 6.3 6.4

Drivers of Growth of the Sri Lankan FMCG Industry . ..........................................................................................................................................49 Global Soft Drinks Industry...................................................................................................................................................................................................51 Ready to Drink Tea (RTD Tea)...............................................................................................................................................................................................52 Global Personal Care Industry.............................................................................................................................................................................................52

7.0 FUTURE DIRECTION AND PROSPECTS........................................................................................................................................................... 53 7.1

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

8.0 INVESTMENT CONSIDERATIONS AND ASSOCIATED RISK FACTORS.................................................................................................... 54 8.1 8.2 8.3

Risk Factors......................................................................................................................................................................................................................................54 Industry Specific Risks..............................................................................................................................................................................................................54 Company Specific Risks..........................................................................................................................................................................................................54

9.0 CORPORATE STRUCTURE.................................................................................................................................................................................... 56 9.1 9.2 9.3 9.4

9.5 9.6 9.7 9.8 9.9 9.10 9.11 9.12

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The Board of Directors.............................................................................................................................................................................................................56 The Board of Directors of HVA Lanka Exports (Private) Limited.....................................................................................................................56 Profiles of the Board of Directors.......................................................................................................................................................................................57 Directors’ Interest in Shares...................................................................................................................................................................................................58 9.4.1 Directors’ Direct and Indirect Shareholdings in the Company...............................................................................................58 9.4.2 Sale or Purchase of Shares by directors................................................................................................................................................58 9.4.3 Directors’ Emoluments....................................................................................................................................................................................58 9.4.4 Other Directorships Held by the Board................................................................................................................................................58 9.4.5 Directors’ Interest in Assets .........................................................................................................................................................................60 9.4.6 Directors’ Interest in any Material Contracts......................................................................................................................................60 9.4.7 Statement – Board of Directors ...............................................................................................................................................................60 Corporate Governance Practices......................................................................................................................................................................................60 Remuneration Committee....................................................................................................................................................................................................61 Audit Committee........................................................................................................................................................................................................................61 Senior Management.................................................................................................................................................................................................................61 9.8.1 Senior Managements’ Emoluments ......................................................................................................................................................62 Statement – Chairman............................................................................................................................................................................................................62 Details of the Management Agreements....................................................................................................................................................................63 Human Resources.......................................................................................................................................................................................................................63 Information Technology.........................................................................................................................................................................................................63

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10.0 CAPITAL STRUCTURE........................................................................................................................................................................................... 64 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9

An Overview of the Capital Structure............................................................................................................................................................................64 Free Transferability of Shares................................................................................................................................................................................................64 Other Securities...........................................................................................................................................................................................................................64 Takeover Offers.............................................................................................................................................................................................................................64 Share Re-Purchases or Redemptions..............................................................................................................................................................................64 Ten Largest Shareholders as at 03rd January 2011................................................................................................................................................64 Major Shareholders of HVA Lanka Exports (Private) Limited from 1990 to date.................................................................................65 Post IPO Shareholding Structure.......................................................................................................................................................................................65 Ratios..................................................................................................................................................................................................................................................66

11.0 MANAGEMENT DISCUSSION AND ANALYSIS.............................................................................................................................................. 67 11.1 11.2

Operating Results.......................................................................................................................................................................................................................67 Performance of Operations for the Five Years Ended 31st March 2010....................................................................................................68

12.0 STATUTORY AND OTHER GENERAL INFORMATION................................................................................................................................... 71 12.1 12.2 12.3 12.4

Hosting of Prospectus, Application Form and the Articles of Association on the Web..................................................................71 Inspection of Documents......................................................................................................................................................................................................71 Brokerage.........................................................................................................................................................................................................................................71 Underwriting.................................................................................................................................................................................................................................71

13.0 TAXATION . .............................................................................................................................................................................................................. 72 13.1 13.2 13.3 13.4 13.5

Corporate Taxation.....................................................................................................................................................................................................................72 Withholding Tax (WHT) for Dividends...........................................................................................................................................................................72 Economic Service Charge (ESC)........................................................................................................................................................................................72 Taxation of Share Transactions...........................................................................................................................................................................................72 Stamp Duty.....................................................................................................................................................................................................................................72

14.0 STATUTORY DECLARATIONS............................................................................................................................................................................. 73 ACCOUNTANT’S REPORT AND FIVE YEAR SUMMARY . ....................................................................................................................................... 75 ACCOUNTANT’S REPORT FIVE YEAR SUMMARY AND LIMITED REVIEW AS AT 30th SEPTEMBER 2010....................................................................................................................................................................... 76 INTERIM FINANCIAL STATEMENTS FOR THE YEAR ENDED 30TH SEPTEMBER 2010 . .............................................................................107 ANNEXURE A – INDEX ON TABLES ILLUSTRATED IN THE PROSPECTUS......................................................................................................128 ANNEXURE B – INDEX ON CHARTS AND FIGURES ILLUSTRATED IN THE PROSPECTUS........................................................................129 ANNEXURE C – COLLECTION POINTS......................................................................................................................................................................130 ANNEXURE D – ‘HELADIV’ BRAND EQUITY............................................................................................................................................................133 ANNEXURE E – CUSTODIAN BANKS.........................................................................................................................................................................134

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SALIENT FEATURES AT A GLANCE Issuer

HVA Foods Limited

Number and Type of Securities to be Issued

19,928,598 Ordinary Voting Shares of the Company

Issue Price

LKR 16 per share

Minimum Subscription per Application

Minimum subscription per application is 100 shares (LKR 1,600). Applications exceeding the minimum subscription should be in multiples of 100 shares

Issue Opening date

12th January 2011

Issue Closing date

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

Amount to be Raised

LKR 318,857,568

Please note that upon the allotment of shares under this Offer, THE ALLOTTED SHARES WOULD BE CREDITED TO THE APPLICANT’S CDS ACCOUNT. If you wish to open a CDS account, you may do so through any one of the Members and Trading Members of the CSE as set out in Annexure C or through any one of the Custodian Banks as set out in Annexure E.

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DEFINITIONS / INTERPRETATIONS The following definitions/interpretations apply throughout this Prospectus, unless the context otherwise requires: “Application Form ”

The official Application Form and/or photocopies of the official Application Form

“Bn”

Billion

“BOI”

Board of Investment of Sri Lanka

“CDS”

Central Depository Systems (Pvt) Limited

“CIS countries”

A regional organization whose participating countries are former Soviet Republics, formed during the breakup of the Soviet Union

“Closure Date”

The date of closure of the subscription list

“Companies Act”

Companies Act No. 07 of 2007

“The Company” or “HVA Food”

HVA Foods Limited

“CSE”

Colombo Stock Exchange

“Directors”

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

“GOSL”

Government of the Democratic Socialist Republic of Sri Lanka

“IPO”

Initial Public Offering

“Issue”

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

“Issuer”

HVA Foods Limited

“LKR”

Sri Lankan Rupees

“Market Day”

Any day on which the CSE is open for trading

“Mn”

Million

“MT”

Metric Ton

“Managers to the Offering”

Acuity Partners (Private) Limited

“NIC”

National Identity Card

“Offered Shares”

Nineteen Million Nine Hundred and Twenty Eight Thousand Five Hundred and Ninety Eight (19,928,598) new Ordinary Shares each issued by the Company, to the general public at the Share Offer Price

“Offer for Subscription” or “Offering” An invitation to the public by the Company to subscribe for Nineteen Million Nine Hundred and Twenty Eight Thousand Five Hundred and Ninety Eight (19,928,598) new Ordinary Shares of the Company “Offering Period”

12th January 2011 to 01st February 2011

“Offer Price”

LKR 16/- per Offered Share

“Ordinary Share(s)” or “shares”

Ordinary Voting Share(s) of the Company

“POA”

Power of Attorney

“SEC”

Securities & Exchange Commission of Sri Lanka

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1.0 CORPORATE INFORMATION Issuer

HVA Foods Limited

Registered Office (HVA Foods Limited)

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

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

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

Telephone Number of the Company

011 223 8714

Company Registration Number (under the Companies Act No. 07 of 2007)

PV 1765

Re- Registration Number (as a Public Company)

PV/PB 1765

Date, Place and Authority of Incorporation

Incorporated as a Private Limited Liability Company on 22nd August 1997 in Colombo at Registrar Of Companies and converted to a Public Company on 03rd November 2010 in Colombo at Registrar of Companies

Company Secretary

P.R. Secretarial Services (Pvt.) Limited No. 59, Gregory’s Road, Colombo 07, Sri Lanka. T: 2697893, 2697894, 2686639

Reporting Accountants / Auditors of the Company

KPMG, Ford, Rhodes, Thornton & Co.

Lawyers of the Company

Paul Ratnayeke Associates,

32 A, Sir Mohamed Macan Marker Mw., P.O. Box 186, Colombo 07, Sri Lanka No. 59, Gregory’s Road, Colombo 07, Sri Lanka

Bankers of the Company

Bank of Ceylon Head Office, No. 4, Bank of Ceylon Mawatha, Colombo 01, Sri Lanka Seylan Bank PLC No. 90, Galle Road, Colombo 03, Sri Lanka Hongkong and Shanghai Banking Corp. No. 24, Sir Baron Jayathilake Mawatha Colombo 01, Sri Lanka

Board of Directors

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Name Mr. A. R. H. Fernando Mr. H. J. Fernando Mr. J. Raddalgoda Mrs. V. S. Amunugama Fernando Mr. N. C. Vitarana Mr. J. H. P. Ratnayeke

| HVA Foods Limited – Initial Public Offering

Designation Chairman Executive Director Executive Director Non-Executive Director Non-Executive (Independent Director) Non-Executive (Independent Director)

2.0 RELEVANT PARTIES TO THE OFFERING Financial Advisors and Managers to the Offering

Acuity Partners (Private) Limited 53, Dharmapala Mawatha, Colombo 03 T: 2206206

Registrars to the Offering

P W Corporate Secretarial (Pvt) Ltd 3/17, Kynsey Road, Colombo 08, Sri Lanka T: 4610476, 4640360-3

Bankers to the Offering

DFCC Vardhana Bank 73, W.A.D.Ramanayake Mawatha, Colombo 02, Sri Lanka

Lawyers to the Offering

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

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3.0 DETAILS OF THE OFFERING 3.1

The Offering The Offering contemplated herein shall constitute an invitation made to the general public to purchase Nineteen Million Nine Hundred and Twenty Eight Thousand Five Hundred and Ninety Eight (19,928,598) new Ordinary Shares of the Company at the Offer Price.

3.2

Nature of the Offered Shares The Offered Shares shall rank equal and pari passu in all respects with the existing Ordinary Shares of the Company with the right to vote, the right to an equal share in any dividend that may be paid by the Company after the allotment of the Offered Shares and the right to an equal share in the distribution of the surplus assets of the Company in a liquidation.

3.3

Size of the Issue If fully subscribed, the Offering would raise Sri Lankan Rupees Three Hundred and Eighteen Million Eight Hundred and Fifty Seven Thousand Five Hundred and Sixty Eight (LKR 318,857,568).

3.4

Offer Price The Offer Price will be LKR 16/-. The Board of Directors of HVA Foods Limited is of the opinion that the Offer Price is fair and reasonable to the Company and to all existing shareholders of the Company.

3.5

Objectives of the Offering The Company intends to raise funds through this Offering to finance the following, in the order of priority. i. Allocation of LKR 45 million for payment for the acquisition of HVA Holdings (Private) Limited for the assignment of international brand rights of “HELADIV” to HVA Foods Limited. The transfer of 18,367 shares of HVA Holdings (Private) Limited to HVA Foods Limited was carried out on the 29th of September 2010 and prior to the transfer, HVA Holdings (Private) Limited was a 100% owned subsidiary of Lake Drive Holdings (Private) Limited. Lake Drive Holdings (Private) Limited is a company owned by Mr. A.R.H. Fernando, Mrs. V.S. Amunugama Fernando and Mr. H.J. Fernando. The international brand rights are registered under HVA Holdings (Private) Limited while the local brand registration of “HELADIV” is registered under HVA Foods Limited. The aforesaid amount of LKR 45 million will be the deferred payment for the transfer of 100% ownership of HVA Holdings (Private) Limited to HVA Foods Limited. Hence, the acquisition will now give total jurisdiction over the brand in Sri Lanka and worldwide covering the manufacture and export of “HELADIV” branded products without hindrance. Moreover, infringement of the brand rights in any foreign country where the brand is registered will also now come under the control of HVA Foods Limited. Price Water House Coopers has conducted a value assessment of the brand on 01st October 2010 and has valued it to be in the range of USD 1.08 million to USD 1.24 million. Please refer Annexure D of this Prospectus. ii. Approximately LKR 95 million will be utilized to reduce gearing of the Company.



Term Loan Settlement Seylan Bank (USD 650,000 @ LKR 115/-) Bank of Ceylon Total



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LKR 74,750,000.00 LKR 20,000,000.00 LKR 94,750,000.00

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

| HVA Foods Limited – Initial Public Offering

iii. Approximately LKR 102 million will be utilized for Ice Tea plant to be upgraded from a pilot plant to a commercial plant and for expansion of facilities in the existing factory. Current capacity of the pilot plant is 100,000 litres of ice tea per month. Subject to the current trial shipments and initial marketing efforts bringing in improved orders, the capacity in the medium term needs to be increased to 300,000 litres per month. This will require approximately LKR 26 million which will cover the securing and expansion of land and building and installation of machinery. As for the expansion of the existing factory, most of the current machines need backups and increased capacity. The current tea bagging capacity of the Company is well below the required demand. Hence, approximately LKR 76 million will be utilized for expansion of the current operations. iv. The remaining balance to finance the incremental working capital requirements of HVA Foods Limited such as retiring expensive short term borrowings and to ensure smooth and efficient operations at the factory by maintaining adequate buffer stocks. The Company expects to utilize the IPO proceeds immediately following the Offering. The Company believes that implementation of activities mentioned herein is imperative for the growth of the business of the Company. The Company is confident that it can meet any shortfall in the event of an under subscription through internally generated funds and borrowings.

3.6

Cost of the Offering The Directors estimate that the total cost of the Issue including the Managers’ fees, Registrars’ fees, fees payable in respect of services rendered by any lawyers, accountants, postage, printing and marketing costs, brokerage, stamp duty payable on the Issue of shares, etc. will be approximately LKR 10.924 million. Such costs will be borne by the Company from internally generated funds.

3.7

Listing The Offering herein contemplated comprises of Nineteen Million Nine Hundred and Twenty Eight Thousand Five Hundred and Ninety Eight (19,928,598) Ordinary Voting Shares. If fully subscribed, the Offered Shares will amount to 30% of the issued and paid up Ordinary Voting Shares of the Company subsequent to the Offering. An Application has been made to the CSE for permission to deal in and for a listing of Sixty Six Million Four Hundred and Twenty Eight Thousand Six Hundred and Sixty (66,428,660) Ordinary Voting Shares being the entirety of the issued and paid up Ordinary Voting Shares of the Company subsequent to the Offering. Upon the successful completion of the Offering, the Company will be listed on the Diri Savi Board of the CSE, subject to compliance with Rule 2.1.3 of the CSE Listing Rules.

3.8

Subscription List and Closure Date The subscription list for the Offered Shares will open at 9.00 a.m. on 12th January 2011 and shall remain open for fourteen (14) Market Days until closure at 4.30 p.m. on 01st February 2011. The Board reserves the discretion to close the subscription list on any Market Day within the period of fourteen (14) Market Days irrespective of the number of shares subscribed by providing one (01) Market Day’s prior notice to the CSE. In the event of an over subscription of the Offered Shares prior to the date scheduled as the closing date of the period for subscription, the Company shall inform the CSE in writing immediately of such fact and the subscription list will be closed at 4.30 p.m. on the same day on which it is fully subscribed with the notification to the CSE.

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3.9

Eligible Applicants Applications are invited from the following categories of Applicants: • Citizens of Sri Lanka who are resident in or outside Sri Lanka and above 18 years of age; • Companies, corporations or institutions incorporated or established within Sri Lanka; • Corporate bodies incorporated or established outside Sri Lanka; • Approved provident funds and contributory pension schemes registered/incorporated/established in Sri Lanka (in this case applications should be in the name of the Trustee/Board of Management in order to facilitate the opening of the CDS account); • Foreign citizens above 18 years of age (irrespective of whether they are resident in Sri Lanka or overseas); • Global, regional and country funds approved by the SEC. Please note that Applications made by individuals under 18 years of age or those in the names of sole proprietorships, partnerships, unincorporated trusts and non-corporate bodies will be rejected at the outset.

3.10

Procedure for Applications Applications must be made in the manner set out below. Applications duly completed should be submitted in the manner set out in Section 3.10.10 hereunder.

3.10.1 The Prospectus and Application Form The Prospectus and Application Form will be available free of charge from the collection points listed in Annexure C. Investors must apply for shares on the Application Form, which constitutes part of this Prospectus. The Application Form should be legibly completed and be received by the Registrars to the Offering. The Application Form and the Prospectus can also be downloaded from www.cse.lk, and www.heladiv.com. Exact size photocopies of the original Application Form will also be permissible. Care must be taken to follow the instructions on the reverse of the Application Form. Applications that do not strictly conform to such instructions and additional conditions set out hereunder or which are illegible may be rejected. Please note that upon the allotment of shares under this Offer, THE ALLOTTED SHARES WOULD BE CREDITED TO THE APPLICANT’S CDS ACCOUNT. If you wish to open a CDS account, you may do so through any one of the Members and Trading Members of the CSE as set out in Annexure C or through any one of the Custodian Banks as set out in Annexure E. Applicants have the option of having their shares ‘locked’* in the CDS. Shares that are locked* would not be available for trading purposes and would not be visible to the participant. Such applicants would have to fill in a separate section in the IPO Application Form for this purpose. If the applicant has not specified that his/her shares need to be deposited to his/her ‘locked’ *balance, please note that the said shares would be deposited to applicant’s ‘trading’ balance. * Definition and operation of a ‘locked’ balance in the CDS In order to preserve the confidentiality of shareholder information and to ensure that securities are not made available for trading for those shareholders who do not want to trade the securities the CDS would provide a mechanism where securities can be “locked” in the CDS account. The CDS would maintain two balances for each CDS account, namely a trading balance and a locked balance. The trading balance would be visible to the CDS participant and all dealings and trading would be permitted on the said trading balance, as done presently.

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| HVA Foods Limited – Initial Public Offering

As opposed to the trading balance, the locked balance will not be visible to the CDS participant and all dealings on such locked balance would be suspended thereby maintaining the confidentiality of the information and also safeguarding the account holder from an unauthorized sale by a broker. At the option and request of an account holder the CDS would transfer a named quantity of shares from the locked balance to the trading balance of a CDS account and /or from the trading balance to the locked balance. 3.10.2 Number of Shares Applied Application should be made for a minimum of one hundred (100) shares or in multiples of hundred (100) shares thereof. Applications made for less than one hundred (100) shares or for a number which is not in multiples of hundred (100) shares will be rejected and accompanying cheques or bank drafts or bank guarantees will not be sent for clearing and be returned via ordinary post at the risk of the Applicant, or in the case of Joint Applicants, the first named Applicant. The cheque or bank draft or bank guarantee should be issued to the exact value of the number of shares applied for multiplied by the Offer Price. Cheques or bank drafts or bank guarantees not conforming to the above requirement will be rejected at the outset. Please refer Section 3.11.1 for details with respect to the mode of remittance. 3.10.3 Identification Information All Applicants should disclose their identification/registration information by filling in the space provided in the Application Form for this purpose. Applicants are requested to state their residency and nationality in the appropriate cages provided in the Application Form. The NIC, passport or company registration number as the case may be, must be stated in the Application Form and any Application Form which does not provide the appropriate identification information will be strictly rejected. Tabulated below is the relevant identification information that a prospective investor should provide depending on the legal status: Citizenship/Legal Form NIC Number

Sri Lankan Citizens

Passport Number

Common Seal or Rubber Stamp

✓

✓

✓

Sri Lankan Citizens with no NIC – Note I

✓

Foreign Citizens – Note II

✓

Corporate Entities – Note III & Note IV

Company Registration Number

Note I: Please note that upon the allotment of shares under this Offer, THE ALLOTTED SHARES WOULD BE CREDITED TO THE APPLICANT’S CDS ACCOUNT. If you wish to open a CDS account, you may do so through any one of the Members and Trading Members of the CSE as set out in Annexure C or through any one of the Custodian Banks as set out in Annexure E. Note II: In the case of Sri Lankan citizens the passport number will be accepted only when the NIC number is not available. The CDS account must be for the same passport number. HVA Foods Limited – Initial Public Offering |

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Note III: F oreign citizens must state the passport number in the space provided. Note IV: T he company registration number must be provided. The common seal or rubber stamp should be affixed and the Application Form duly signed as stipulated in the constitutional documents of such Applicants. 3.10.4 Responsibility of a Non-Resident Investor Non-resident investors may be affected by the laws of the jurisdiction of their residence. If the non-resident investors wish to apply for the shares at the IPO, it is their responsibility to comply with the laws relevant to the jurisdiction of their residence and of Sri Lanka. 3.10.5 Margin Trading Applicants who wish to apply through their margin trading account, should submit the Application in the name of the “margin provider/Applicant’s name” signed by the margin provider. The Applicants should state the relevant CDS account number relating to the margin trading account in the space provided for the CDS account number in the Application Form. The NIC, passport or company registration number of the Applicant as the case may be, must be stated in the Application Form. A photocopy of the margin trading agreement must be submitted along with the Application. Please note that the margin provider can apply under its own name and such Applications will not be construed as multiple Applications (details of multiple Applications are available under Section 3.10.8). 3.10.6 Applications made under Power of Attorney In the case of Applications made under Power of Attorney, a copy of the said POA, certified by a Notary Public to be a true copy of the original, should be lodged with the Registrars to the Offering along with the Application Form. The original POA should not be attached. 3.10.7 Joint Applications Joint Application Forms should not exceed three Applicants (except in the case of executors, administrators or heirs of a deceased member). Joint Applicants should note that all parties should either be residents of Sri Lanka or non-residents. An Applicant of a Joint Application shall not apply through a separate Application Form either individually or jointly. Only one Application will be accepted on behalf of a natural person. 3.10.8 Multiple Applications An Applicant can apply under only one Application Form. If an Applicant has applied under more than one Application Form it will be construed as multiple Applications. An Applicant of a Joint Application, applying through another Application Form is also deemed to have made multiple Applications. An Applicant who has made an Application under a margin trading account should not apply individually or jointly on a separate Application Form. Such Applications will also be construed as multiple Applications. The Company/Managers/Registrars to the Offering reserve the right to reject all multiple Applications and suspected multiple Applications or to accept only one Application Form at their discretion.

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| HVA Foods Limited – Initial Public Offering

3.10.9 Rejection of Applications • Application Forms which are incomplete in any way and/or are not in accordance with the terms and conditions set out in this Prospectus will be rejected at the absolute discretion of the Company/Managers/ Registrars to the Offering. • Any Application Form which does not provide the NIC, passport or company registration number as the case may be, will be strictly rejected. • Applications delivered by hand after 4.30 p.m. local time on the Closure Date of the Offering will be rejected. Applications received by courier/post after 4.30 p.m. local time on the succeeding Market Day immediately following the Closure Date of the Offering, will also be rejected even if they carry a courier acceptance date/ postmark date earlier than the Closure Date. • Applications made for less than one hundred (100) shares or for a number which is not in multiple of hundred (100) shares will be rejected. • In the case of multiple Applications and suspected multiple Applications, the Company/Manager/Registrars to the Offering reserve the right to reject all or to accept one Application Form at their discretion. • An Application Form accompanied by two or more cheques or bank drafts or bank guarantees will be rejected at the outset. • Applications made by individuals below 18 years of age or those in the names of sole proprietorships, partnerships, unincorporated trusts and non-corporate bodies will be rejected. Notwithstanding any provision contained herein, the Board of Directors shall reserve the right to refuse any Application or to accept any Application in full or part. 3.10.10 Submission of Applications Application Form properly filled in accordance with the instructions thereof, along with the applicable remittance for full amount payable on application should be enclosed in a sealed envelope marked “HVA Foods Limited – Initial Public Offering” on the top left-hand corner and be addressed and dispatched by post or courier or delivered by hand to the Registrars to the Offering at the following address.

P W Corporate Secretarial (Pvt) Ltd



3/17, Kynsey Road,



Colombo 08

Applications may also be handed over to the Managers to the Offering, the Bankers to the Offering and its designated branches, members and trading members of the CSE as set out in Annexure C prior to 4.30 p.m. local time on the Closure Date. In the case of Applications dispatched by courier or post, such Applications should reach the Registrars to the Offering prior to 4.30 p.m. local time on the Market Day immediately following the Closure Date. Any Applications received after the above deadline shall be rejected even though the courier or post mark is dated prior to the Closure Date.

3.11

Payment of Application Monies

3.11.1 Mode of Remittance Payment should be made separately in respect of each Application by way of a cheque or bank draft or bank guarantee. Remittances on Applications will be deposited in a separate bank account in the name of “HVA Foods Limited – Initial Public Offering”. Payment for Applications for values up to Rupees One Hundred Million (LKR 100,000,000/-) could be supported by a cheque or bank draft or bank guarantee. Payment for Applications above and inclusive of Rupees One Hundred Million (LKR 100,000,000/-) should only be accompanied by a bank guarantee. HVA Foods Limited – Initial Public Offering |

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Each Application Form should be accompanied by only one cheque or bank draft or bank guarantee and should be issued for the full amount indicated in the Application Form. An Application Form accompanied by two or more cheques or bank guarantees will be rejected at the outset. Cash will not be accepted. Anyone wishing to pay cash should obtain a bank draft from any commercial bank in Sri Lanka. 3.11.2 Cheques or Bank Drafts – Resident Sri Lankan Investors Cheques or bank drafts should be drawn on any commercial bank in Sri Lanka and crossed “Account Payee Only” and made payable to “HVA Foods Limited – Initial Public Offering”. Cheques or bank drafts accompanying Application Forms made for less than one hundred (100) shares or for a number which is not in multiples of hundred (100) shares will not be sent for clearing and shall be returned via ordinary post at the risk of the Applicant, or in the case of Joint Applicants, to the first named Applicant. In the event that cheques are not realized within three (03) Market Days from the day of presenting the same to the bank for clearing, the cheques will be returned and no allocation of shares will be made to the investors. Investors residing in outstation areas from which cheque clearance may take over two (02) Market Days are advised to make payment via bank drafts to avoid any delays. Cheques must be honoured on first presentation to the bank for the Application to be valid. Applications supported by cheques which are not honoured on the first presentation will be rejected. 3.11.3 Bank Guarantees – Resident Sri Lankan Investors Applications made by resident Sri Lankan investors backed by bank guarantees presented in line with the requirements set out in Section 3.11.1 will be accepted. Bank guarantees will be presented to the respective banks only after the shares have been allotted/allocated. Bank guarantees should be issued in favour of “HVA Foods Limited – Initial Public Offering” in a manner acceptable to the Company and be payable on demand. Investors are advised to ensure that sufficient funds are made available in order to honour the bank guarantee, inclusive of charges, when called upon to do so by the Registrars to the Offering. Investors are encouraged to discuss with their relevant bankers with regard to the issuance of bank guarantees and all related charges that would be incurred by the investors. Foreign investors and non-resident Sri Lankan investors should refer Section 3.11.4 for information regarding procedures for bank guarantees. 3.11.4 Foreign Currency Remittance This section is applicable to citizens of Sri Lanka who are above 18 years of age and resident overseas, corporate bodies incorporated or established outside Sri Lanka, global, regional or country funds approved by the SEC and foreign citizens (irrespective of whether they are resident in Sri Lanka or overseas) who are above 18 years of age. The above mentioned Applicants should make their payments using one of the following methods as the case may be.

• A foreign investor may invest through a Securities Investment Account (SIA) maintained with any commercial bank in Sri Lanka. The procedure for arranging payments through a SIA is presented below:



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• A foreign investor may use the services of a custodian bank as an intermediary when investing in the Sri Lankan securities market.

| HVA Foods Limited – Initial Public Offering



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



• In respect of global, regional or country funds investing for the first time in Sri Lanka, the intermediary will facilitate the approval process regulated by the SEC.



• Payment for shares should be made through a cheque or bank draft or bank guarantee against the funds in the SIA and made payable to “HVA Foods Limited – Initial Public Offering”.

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

Banking Unit (FCBU) account of the Applicant maintained with any commercial bank in Sri Lanka. The Applicant should forward the Application Form supported by a bank guarantee drawn on the Applicant’s FCBU account pending allotment of shares.



• Upon allotment of shares, foreign currency to the extent of the Sri Lankan Rupee equivalent value shares allotted would be called on the bank guarantee drawn on the Applicant’s FCBU account. The requisite funds would then be credited to a SIA opened in favour of the Applicant via the aforementioned FCBU account.



• This procedure would protect a prospective investor from any losses accruing due to fluctuating exchange rates.

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

Sri Lanka under the Resident Guest Scheme may invest through the Resident Guest Foreign Currency Account (RGFCA) maintained with any commercial bank in Sri Lanka. An investor who wishes to avail him/herself of this facility should make the payment for shares through a bank draft or a bank guarantee against the funds in the RGFCA and made payable to “HVA Foods Limited – Initial Public Offering”.

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

companies through Rupee Accounts for Non-Resident Sri Lankan Investment (RANSI) maintained with authorized dealers.



• Sri Lankan citizens who have left the country to take up employment, business or a profession and continue to reside abroad and those citizens of Sri Lanka who have made their permanent place of abode outside Sri Lanka are eligible to operate a RANSI with authorized dealers.



• Remittances by non-resident Sri Lankans in connection with this share Application Form must be made via bank drafts purchased out of funds in the RANSI. There are no exchange control restrictions on remittance of funds that may be available in a RANSI.



• Where a RANSI holder is also the holder of a Non-Resident Foreign Currency (NRFC) account, movement of funds between a RANSI and a NRFC account of the account holder is freely permitted, so long as the account holder continues to reside abroad and does not cease to be a citizen of Sri Lanka. Therefore, funds in the NRFC account could be transferred to a RANSI through which investment in shares could be made.

Cheques or bank drafts or bank guarantees should be endorsed by the issuing custodian bank, to the effect that, such payment has been made against funds available in the individual’s SIA/FCBU/RGFCA account. The endorsement must be clearly indicated on the cheque or bank draft or the bank guarantee. Alternatively, a document detailing the endorsement could be submitted along with the payment and Application. Bank drafts drawn on a RANSI account should also be endorsed in line with the above. Applications supported by foreign currency remittances should be made in conformity with requisite declarations accompanied by the documentation stipulated by the Controller of Exchange.

HVA Foods Limited – Initial Public Offering |

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3.11.5 Restrictions Applicable to Foreign Citizens Resident in Sri Lanka Foreign citizens resident in Sri Lanka may make payments through Sri Lankan Rupee accounts only if they possess dual citizenship where one such citizenship is Sri Lankan. Foreign citizens having Sri Lankan citizenship should attach a certified copy of the citizenship certificate with the Application Form. Foreign citizens residing in Sri Lanka having valid residency visas should note that they cannot make remittances via cheques or bank drafts or bank guarantees drawn on Sri Lanka Rupee accounts held in Sri Lanka but may do so via SIA/FCBU/RGFCA account as detailed in Section 3.11.4 above. Applications made by foreign citizens not in accordance to the foregoing shall be rejected.

3.12

Banking of Payments All cheques or bank drafts or bank guarantees received in respect of Applications will not be banked or called on until the Market Day after the Closure Date of the subscription list, in terms of the CSE Listing Rules.

3.13

Returning of Monies of Rejected Applications Where an Application Form is rejected, the cheque or bank draft or bank guarantee received in respect of the Application will be returned via ordinary post at the risk of the Applicant. In the case of Joint Applicants, Application monies will be returned to the first named Applicant. Where the Application Form is accepted and the cheque or bank draft or bank guarantee is not honoured at the first presentation, the Application will also be rejected and the cheque or bank draft or bank guarantee will be returned via ordinary post at the risk of the Applicant. In the case of Joint Applicants, Application monies will be returned to the first named Applicant.

3.14

The Basis of Allotment The Offered Shares would be distributed among three broad investor categories, namely: Employees *

5% of the Offered Shares

Retail

30% of the Offered Shares

Non-Retail

65% of the Offered Shares

* Permanent employees of HVA Foods Limited Investors who apply for up to a maximum of 5,000 shares will be deemed as Retail investors for share allotment purposes. Investors who apply for shares in excess of 5,000 shares will be deemed as Non-Retail investors for share allotment purposes. The investor categories have been selected to ensure the broadest possible spread of shareholders while treating all Applicants in a fair manner. In the case of an under subscription of any one or more categories relative to the allocation mix specified above, the quantum of shares undersubscribed may be redistributed and allocated to the other categories that may be oversubscribed. Decisions relating to the amount of any share redistribution and as to which category would receive first priority in selection for allocation of the under subscribed shares will be made at the discretion of the Board of Directors of the Company. Such distribution would be made in a fair manner. Redistribution shall not apply in the event of oversubscription of all three categories mentioned above. In the event of an over subscription of any one or all categories mentioned above the basis of allotment will be decided by the Board of Directors of the Company before the expiry of seven (07) market days from the date of closure of the subscription list and immediately notified to the CSE.

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| HVA Foods Limited – Initial Public Offering

3.15

Refunds on Applications Where an Application is accepted only in part, the balance of the monies received on Application will be refunded. Refunds on shares that have not been allotted will be refunded on or before the expiry of ten (10) Market Days from the Closure Date (excluding Closure Date) as required by the CSE Listing Rules. Applicants would be entitled to receive interest at the last quoted AWPLR published by the Central Bank of Sri Lanka plus 5%, on any refunds not made before the expiry of the above mentioned period. Refunds via Sri Lanka Inter-bank Payment Systems: •

The refund payment will be made to the bank account specified by the Applicant through the Sri Lanka Inter-bank Payment System (SLIPS) which is subject to a maximum limit of LKR 5 million, on or before the expiry of ten (10) Market Days from the Closure Date (excluding Closure Date) as required by the CSE Listing Rules and a payment advice shall be issued to the Applicant provided that the Applicant has submitted accurate and complete details of his bank account in the Application Form. In the event the refund payment is effected via SLIPS based on the bank account details provided by the Applicant in the Application Form, but is rejected by the Applicant’s bank due to inaccurate or incomplete information, such refund payments would be made via a crossed cheque in favour of the Applicant and sent by ordinary post at the risk of the Applicant. In such instances, the Company together with the Registrars to the Offering will send the refund cheques to such Applicants at the earliest possible and the Applicant should not hold the Company or the Registrars to the Offering accountable for such delays.

Refunds via crossed cheque: •

If the Applicant has not provided details of the bank account in the Application Form or has provided inaccurate or incomplete details of the bank account, the refund payment will be made by a crossed cheque in favour of the Applicant and sent by ordinary post at the risk of the Applicant. In the case of a Joint Application, a crossed cheque will be drawn in favour of the Applicant whose name appears first in the Application Form. Further, even if the Applicant has requested for SLIPS transfer for refund amounts and submitted accurate and complete details of the bank account in the Application Form, refund amounts exceeding LKR 5 million will also be made by a crossed cheque in favour of the Applicant and sent by ordinary post at the risk of the Applicant.

A request cancellation of crossing on the refund cheque, in instances where the Applicant does not maintain a current account, should be addressed to the Registrars to the Offering in writing, stating the cheque number and the fact that the Applicant does not maintain a current account. The refund cheque and a clear photocopy of the Applicant’s NIC should accompany the letter. In the event of a cheque being delivered by hand by a third party to the Registrars to the Offering for cancellation of crossing, a letter of authorization signed by the Applicant stating the NIC number of such third party should also be presented with the cheque. Cheques on which the crossing has been cancelled by the Registrars to the Offering should preferably be collected in person or by a third party authorized by the Applicant. Where an Applicant has requested the delivery of a cheque on which the crossing has been cancelled via post, the cheque will be sent at the risk of the Applicant.

HVA Foods Limited – Initial Public Offering |

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3.16

Successful Applicants and CDS Lodgement The Securities & Exchange Commission of Sri Lanka has directed to mandate the lodging of share certificates pertaining to all listed securities at the Central Depository Systems. Please note that upon the allotment of shares under this Offer, THE ALLOTTED SHARES WOULD BE CREDITED TO THE APPLICANT’S CDS ACCOUNT. If you wish to open a CDS account, you may do so through any one of the Members and Trading Members of the CSE as set out in Annexure C or through any one of the Custodian Banks as set out in Annexure E. Applicants have the option of having their shares ‘locked’* in the CDS. Shares that are locked*would not be available for trading purposes and would not be visible to the participant. Such applicants would have to fill in a separate section in the IPO Application Form for this purpose. If the applicant has not specified that his/her shares need to be deposited to his/her ‘locked’* balance, please note that the said shares would be deposited to applicant’s ‘trading’ balance. The Offered Shares allotted will be directly uploaded to the respective CDS account given in the Application Form before the expiry of eighteen (18) Market Days from the Closure Date of the Offering as required by the CSE Listing Rules. A written confirmation informing successful applicants on their allotment of shares will be dispatched not later than ten (10) Market Days from the closure of the Issue. Application Forms stating third party CDS accounts instead of their own CDS account numbers, except in the case of margin trading accounts, will be rejected.

3.17

Transferability of Offered Shares Offered Shares shall not be transferable by the shareholders during the period between the date of allotment of the Offered Shares and up to the date of listing (excluding the date of listing) of the Ordinary Shares of the Company on the CSE.

3.18

Declaration to the Colombo Stock Exchange and Secondary Market Trading The Company will submit to the CSE a declaration on the Market Day immediately following the day on which investors’ CDS accounts are credited with securities. Trading of Ordinary Shares of the Company on the secondary market will commence on or before the third (3rd) Market Day from the receipt of the declaration by the CSE.

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| HVA Foods Limited – Initial Public Offering

4.0 BUSINESS OPERATIONS OF HVA FOODS LIMITED HVA Foods Limited was established in 1997 as a Board of Investment approved company under Section 17 (2) of BOI Law No. 4 of 1978 dated September 04, 1997. It was specially set up to engage in export of value added branded tea, tea extract based products, tea concentrate based products and a franchise operation. It is a fully owned subsidiary of HVA Lanka Exports (Private) Limited which was established in 1990 as an exporting arm of HVA International BV of Netherlands. Subsequently HVA Lanka Exports (Private) Limited became a complete Sri Lankan business entity and started exporting tea in bulk form to establish its trade network and to develop a client base. Since its inception, HVA Group has won six Gold Awards as the Exporter of the Year in both traditional and non-traditional exports from Sri Lanka. Identifying the need to create a tea brand with the uniqueness of its origins, HVA Foods Limited created its own brand, “HELADIV” in 1996. “HELADIV” is derived from the word “Heladiva” which symbolizes a home grown product range and a name that could easily be identified with Ceylon tea. The “HELADIV” brand is registered in 42 countries around the world and has also been the pioneers in developing Ready-To-Drink iced tea in the Sri Lankan market.

4.1

Group Structure HVA Foods Limited is a subsidiary of HVA Lanka Exports (Pvt.) Limited. The structure of the Company as at 30th September 2010 is depicted below. Figure 4-1: Group Structure

HVA Lanka Exports (Pvt.) Limited 100% HVA Foods Limited

99.9999% HVA Holdings (Private) Limited

HVA Lanka Exports (Private) Limited is the parent company of HVA Foods Limited and is principally involved in exporting of bulk tea. HVA Foods Limited – The Company is involved in manufacturing and exporting of value added tea and tea extract based products. HVA Holdings (Private) Limited – Owns the international brand rights of “HELADIV”.

4.2

Products Offered HVA Foods Limited is a leader in the manufacturing, marketing and distribution of four major product categories; value added tea based products, tea extract based products, tea concentrate based products and its franchise operations. There are about 80 products presently being marketed under the “HELADIV” brand which includes a range of flavours and presentations including black tea, green tea, herbal tea, specialty teas, tea concentrate with pure tea extract, fruit base, and various other value added tea products.

HVA Foods Limited – Initial Public Offering |

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4.2.1

Value Added Tea Based Products Some of the popular products offered under this category are given below. HELADIV TEA SPECIAL (presented in eco-friendly packaging) HELADIV Blue Fire

HELADIV Strawberry Delight

Select best Ceylon Black Tea blended with cornflowers and rosehips giving a fiery blue tinge to the appearance. The blend is enriched with natural flavours of kiwi, guava, passion fruit, spearmint and ginseng.

Ceylon black tea & freeze dried strawberry flavoured with cherry and rose for an invigorating tea drink when brewed light.

HELADIV Tropical Magic

HELADIV Sunset Soother

A wiry whole leaf tea blended with dried pineapple cubes and flavoured with the essence of the delicious soursop fruit.

Ceylon black tea mixed with indigenous Ranawara flowers and flavoured with nature identical vanilla, cinnamon, orange and almond flavour.

HELADIV Zeus A truly magical blend of long leaf black tea, generously blended with sun-dried sunflower strands and impregnated with natural mango flavour

HELADIV PRIDE OF CEYLON

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HELADIV Pride of Ceylon

HELADIV English Breakfast

Reaearch shows that Black Tea has health benefits equal to its green cousin and is currently the most popular tea around the world.

Ideal as a breakfast tea.

| HVA Foods Limited – Initial Public Offering

FLAVOURED TEA HELADIV Strawberry

HELADIV Orange

Combining the full and succulent flavour of sweet strawberries with Ceylon black tea

Combining the fresh citrus flavour of oranges and premium Ceylon black tea

HELADIV Cherry

HELADIV Peach

The premium Ceylon tea flavoured with the deep richness of summer cherries, is a soothing drink for all seasons

Black tea flavoured with sweet peaches

HELADIV Rose

HELADIV Earl Grey

A beautiful blend of Ceylon black tea scented with rose buds for a fragrantly memorable tea break any time of the day

Premium black tea from Sri Lanka, flavoured with oil of bergamot, a citrus fruit.

GOOD LIFE TEA INFUSION HELADIV Slimming Tea

HELADIV Long Life Tea

Slimming Tea contains a blend of dried Garcinia, Black tea and Earl Grey flavour, producing a delicious brew.

Long Life Tea contains a blend of Gotukola and nature identical Mandarin flavouring ingredients. Gotukola purifies blood and reduces nervousness.

HELADIV Winter Tea

HELADIV Anti-Stress Tea

An exquisite combination of tea with corainder, ginger and pepper containing essential oils to help fight coughs and colds

A blend of dried gotukola leaves (Centella Asiatica), Ceylon green tea and natural lemon flavour

HVA Foods Limited – Initial Public Offering |

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HERBAL INFUSION HELADIV Ginger

HELADIV Rosehip

Heladiv introduces natural herbal remedies in a range of popular herbs. Available in easy to brew tea bags, the herbal infusions are invigorating and soothes the body.

A blend of the rosehip flower and hibiscus petals providing a fragrant and delicious cup of tea. It is a vibrant drink with lots of healing power due to its anti-aging properties.

HELADIV Peppermint Refreshing,invigorating herbal drink, ideal calming the digestive system and relieving symptoms of heart burn, stomach ache and nausea.

GREEN TEA HELADIV Pure Ceylon Green Tea Green tea is widely enjoyed not only for medicinal effects, but also for the many dimensions of flavour that can be experienced through the different varieties.

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HELADIV Pure Ceylon Green Tea with Lemon flavour Ceylon Green Tea with the delicate flavours of lemon and lime, makes a light and refreshing drink that is popular both hot and iced.

HELADIV Pure Ceylon Green Tea with Grapefruit flavour

HELADIV Pure Ceylon Green Tea with Mandarin flavour

An exotic blend of Ceylon Green Tea and grapefruit flavour is a refreshing beverage with the delicate tang of grapefruit.

Green tea from Ceylon with the delicate flavour of mandarin is a delicious union of great taste and proven health benefits, which makes a light and refreshing drink that is popular both hot and iced.

| HVA Foods Limited – Initial Public Offering

SUMMER FLOWERS HELADIV Ruhunu OP

HELADIV Sparkling FBOP

Tightly rolled whole leaf tea which gives a delicate taste when brewed. Orange Pekoe is easy to brew and produces a bright and brisk beverage which tastes best when consumed with a dash of sugar and lemon float. This is also ideal for home made iced tea.

Tightly rolled cut leaf of the Orange Pekoe type with a liberal mix of sparkling tips. Unopened ends of the tea buds are converted to tips during manufacture.

HELADIV Classic GP Heladiv Premium Gun Powder is the Green Tea version of Super Pekoe. Ceylon Gun Powder is much sought after because it is ecologically pure compared to many similar products from other origins.

PAPER TUBES HELADIV Green Tea Peach

HELADIV Strawberry and Tea

Pure Ceylon Green Tea Pekoe is blended with delicious peach fruit.

The European special, the red strawberry gives flavour to the black and green tea

HELADIV Mango Flavoured

HELADIV Blue Fire Tea

The luscious tropical mango is the dominant character of this special blend.

The ingredients contained in this blend will invigorate you and fire the dormant powers within your soul.

HVA Foods Limited – Initial Public Offering |

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4.2.2

Tea Extract Based Products As a result of the Company’s continuous effort for diversification, it has now identified “Ready-To-Drink” iced tea as part of its product portfolio. This product has already been introduced to the local and international markets like Maldives, Australia, USA and New Zealand under the “HELADIV” brand name. As a result, the Company has built a special plant called the “HELADIV Innovative Centre”, for the manufacturing of its iced tea. At this plant, tea is extracted from tea fibers or BM (Broken Mix) Fannings through a hygienic process by using modern technology. The extracted tea essence is further processed into a range of Ready-To-Drink Ice Teas. The nonsoluble tea from this process is being tested for development of applications in the Pharmaceutical, Beauty Care and Hospitality industries. The residue or “Spent leaf” rich in plant nutrients, is being tested as a rooting medium for plant nurseries. “HELADIV” Ready-To-Drink Ice Tea has been in the local and selected international markets for several years. This product is fortified with real fruit extract and is a preferred drink amongst the younger generation. With the pilot plant being upgraded to a commercial platform, post IPO, extensive worldwide marketing of the product will be undertaken. Moreover, negotiations have been successful with one of the leading local airlines to serve “HELADIV” Ice Tea on board. Several local supermarkets also carry the product. A strategically designed on-ground marketing and sampling effort of the product has confirmed the acceptability amongst potential consumers. It is the intention of the Company to launch an integrated campaign aimed at securing a share of the local and global non-carbonated soft drink market. Once the pilot extraction plant is upgraded to a commercial level of operation, a capacity of approximately 5,000-7,000 litres of tea concentrate a month can be produced. The raw materials used for production is the abundantly available BM Fannings. Currently, a production volume of approximately 40 million kilos of BM Fannings is generated per annum. The monthly input of BM Fannings in the new plant will be approximately 20 metric tons. Products generated from this process will relate to tea concentrates sufficient to manufacture 100,000 litres of Ice Tea, 20 metric tons of nursery material and approximately 1,000 litres of concentrated tea compounds for other industrial applications. It is expected at the first financial year of commercial operation beginning 1st April 2011 the Company will have a marketable value for extract based products amounting to approximately LKR 100 million per annum. ICE TEA Strawberry Ice Tea Pure Ceylon Tea, Strawberry and Apple Concentrate, Citric Acid, Caramel, Ascorbic Acid, Sugar, Water, Natural and Nature Identical Flavours, Sodium Benzoate (E211) and Potassium Sorbate (E202) to Preserve Freshness Apple Ice Tea Pure Ceylon Tea, Apple Concentrate, Citric Acid, Ascorbic Acid, Sugar, Water, Natural and Nature Identical Flavours, Sodium Benzoate (E211) and Potassium Sorbate (E202) to Preserve Freshness Lemon Ice Tea Pure Ceylon Tea, Lemon and Apple Concentrate, Citric Acid, Caramel, Ascorbic Acid, Sugar, Water, Natural and Nature Identical Flavours, Sodium Benzoate (E211) and Potassium Sorbate (E202) to Preserve Freshness

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| HVA Foods Limited – Initial Public Offering

4.2.3

Tea Concentrate Based Products HVA Foods Limited has also ventured into tea cosmetics and pharmaceutical products which include skin care, oral care, body care, facial care, food grade dye and tea tablets. These innovative products are expected to be marketed in Japan, Singapore, Russia and in Central America. SKIN CARE - The Company produces tea bath products in individually sealed envelopes each containing a nylon bag with green tea and natural herbs. Ingredients: Ceylon Green Tea, Sandalwood, Iramasu, Weniwal, Jasmine Flowers Health benefits: Designed to treat the skin or deliver the herbs through skin absorption. The heat of the water releases the fragrance and activates the properties of the herbs, while opening the pores of your skin. The inhaled scent passes through the nervous system to the brain, while the properties absorbed through the skin passes in to the blood stream. ORAL CARE – Made from green tea extract and is safe for daily use even by children due to the absence of alcohol. Ingredients: Ceylon green tea extract, Sorbitol, Glycerin Sodium benzoate, Flavours, Water Health benefits: Designed to help prevent tooth decay. “HELADIV” mouth wash is anti-bacterial, anti-cavity, anti-gingivits, anti plaque and contains antioxidants whilst acting as a breath freshener. BODY CARE – “HELADIV” green tea body gel is a unique and extraordinary formula in which a blend of pure Ceylon green tea extract and natural ingredients are combined. Ingredients: Ceylon green tea extract, SLES 70%m Glycerin, Sodium amphora acitate, Parabance, Frangrances, De-ionized water Health benefits: Powerful antioxidant, thereby reducing free radical damage of the skin. It is also a potent anti-inflammatory agent, thereby reducing inflammation in the skin. It also has an inhibitory action on collagens and enzymetic action in the skin where the collagen is broken down resulting in more firm and elastic skin. FACIAL CARE – A concentrated facial mask that could be used weekly to enhance and maintain the skin. Ingredients: Diatomaceous Earth, Alginate, Calcium Sulfate, Tetra sodium pyrophosphate with extracts of Green tea, Weniwal, Gotukola Health benefits: The combination of tea and herbal extracts with finely ground minerals boost the complexion of the skin and reduce signs of aging and improve blood circulation. FOOD GRADE DYE – This is used in the confectionery industry as a colouring agent. Alternatively, tea waste is a valuable product used in several industrial extract including henna dye. It is a safe and cost-effective option in handling food products. Ingredients: Tea waste TEA TABLET – The tea extract offers a convenient way to get the benefits of tea in highly concentrated tablet form. It is considered to be a potent antioxidant. This is intended to prepare a cup of tea within seconds. Tablets can be chewed as-is or added to a cup of hot or cold water. Especially the combat troops will find the new product easy to carry and prepare. Ingredients: Tea waste

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4.2.4

Franchise Operation Apart from the “HELADIV” brand, the Company has also ventured into the Chinese market through a sub brand called “INFINI-T”. INFINI-T is a sub brand owned by Lake Drive Holdings (Pvt.) Limited and its registration, locally as well as internationally, is currently being processed. The prospects of developing an exclusive chain of tea cafes was first developed with a proposal put forward by a Chinese company, involved in diversified business interests including tea plantations. On a fact finding mission in 2009, it was revealed that the Chinese consumed around 900 million kg of tea per annum mainly comprising of green tea varieties. One particular chain of shops in China has over 1,000 outlets spread throughout the country, and known to be generating over a billion dollars of revenue per annum. Hence, it was decided to use China as the test market for the franchise operation by giving the Chinese consumer a unique product in tea under the “Pure Ceylon tea” concept. In July 2009, the first three franchise shops were opened in Quanzhou, Jinjiang in the province of Fujian and in Beijing. During the past one year the number of shops in China has increased to 10. All the shops in China carry pure Ceylon tea packed in Sri Lanka or in China under the franchise rights of HVA Foods Limited. This operation in China under the style and name Beijing Pure Ceylon Tea Company Ltd as per the MoU signed on 24th February 2009, has undertaken investment in expanding the number of shops to 100 within 3 years. There are no other parties to the MoU and it authorizes Beijing Ceylon Tea Company Ltd. to use the INFINI-T logo and the HVA Group logo for products manufactured by the company within the Chinese geographical territory and brand promotional activities carried out within the said territory. The operation at present centers around selling exquisite gift teas and top of the range specialty teas to affluent Chinese consumers who look for high quality branded products which are palatable in terms of traditional tastes. In addition, regular participation at exhibitions and food shows is undertaken by the Beijing Pure Ceylon Tea Company Ltd to promote the goodness and uniqueness of pure Ceylon tea. The value of investment by the Chinese party is estimated to be around USD 5 million within the last one year. Stemming from the experience of the Chinese franchise shops, a new strategy will be put in place to introduce tea franchise shops under the sub brand INFINI-T in selected markets around the globe. This process will be initiated in 2011 and the company hopes to enjoy a moderate financial benefit in the first year of operation by targeting to establish a minimum of 10 shops other than for those already established in China and earmarked to be set in Sri Lanka and elsewhere.

4.2.5

Revenue Breakup of the Products Offered Given below is a breakup of total revenue based on the four main product categories and based on the different geographical markets. Chart 4-1: Break up of Total Revenue based on Product Category 0.35%

0.01%

99.63%

Value added tea products...................99.63% Tea extract based products ......................... 0% Tea concentrate based products........0.35% Franchise Operations ................................0.01%

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Even though almost all revenue is from value added tea products, the Company expects a change in the future as its new product categories will be marketed in new markets. So far mostly black tea has been exported under the franchise operations and the Company plans to export more of value added tea beginning 2011. Chart 4-2: Break up of Total Revenue based on Geographical Market 18.00%

10.00%

4.00%

Far East.................................................................. 18% Middle East............................................................ 0% USA, Canada......................................................... 4% 68.00%

CIS Countries..................................................... 68% Europe .................................................................. 10%

4.3

Markets For more than 15 years, “HELADIV”’s reputation and distinctive image have consistently developed across an expanding number of products, brands and international markets. The “HELADIV” brand is registered in 42 countries with over 250 retail chains in the CIS, Far Eastern and the European markets and is in the process of expanding into other markets as well. In its latest foray into exclusive foreign markets, the Company has also set up a chain of exclusive tea shops in China with expansion potential to increase the branches to 100 within three years. Figure 4-2: Market Concentration

ASIA/FAR EAST China Japan Malaysia Singapore Taiwan Thailand Hong Kong South Korea Philippines Maldives Kazakhstan

USA/CANADA Canada USA Barbados Jamaica St. Lucia St. Vincent Trinidad Belize

CIS Russia Ukraine Latvia Lithuania

EUROPE Germany United Kingdom Belarus

Australia New Zealand

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

16.00%

17.00%

3.00%

Far East............................................................16.00% Canada / U.S.A...............................................3.00% CIS......................................................................64.00% 64.00%

Europe ............................................................17.00% Source : HVA Foods Limited

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

CIS Region “HELADIV” branded products are distributed within this region in Russia, Ukraine, Latvia, and Lithuania. Currently, exports to Russia make up the major portion of “HELADIV” export revenue which stands close to USD 300,000 per month. The tea market in Russia is dominated by Russian tea brands that come under ORIMI Group, May Tea Group, SAPSAN Tea Company, Ahmed brand and Unilever brands of Lipton and Beseda which together control close to 65%-70% of the Russian tea market. The remainder is spread among approximately 70 other brands, which also include “HELADIV”. According to Euromonitor, the total Russian market for tea is expected to grow by a CAGR of 3% over the next three years. Table 4-1: Forecast of Total Sales Volumes for the Russian Market 2010 199.3 3%

Tea sales (million kg) Growth (%)

2011 205.3 3%

2012 211.3 3%

Source: Euromonitor International Reports

They also expect the consumption of Tea Bags and Specialty Tea to grow as well. Therefore, all the leading companies are focusing on either production of tea bags or specialty tea categories. Moreover, Russian consumers prefer to purchase well-known brands due to their perceived high quality. HVA Foods Limited has maintained long standing relationships within the Russian market which span over two decades. Hence, this has helped the Company in gaining recognition for its “HELADIV” brand among Russia’s quality conscious consumers. Historically, the Russian Federation and other CIS countries have accounted for over 80% of “HELADIV”s revenues. Table 4-2: CIS and Russian Federation: Historical Movement of Values and Volumes Exported CIS and Russian Federation Value (USD) Volume (kg)

2005 731,350 168,578

Source: HVA Foods Limited

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| HVA Foods Limited – Initial Public Offering

2006 1,278,170 266,499

2007 1,740,060 262,929

2008 1,366,819 196,895

2009 2,040,424 275,792

In 2009, the CIS and Russian Federation accounted for 81% of total “HELADIV” tea sales and 86% of total “HELADIV” volumes exported. Significant growth had been experienced within this region with export revenue recording a CAGR of 29.2% over the 5 year period from 2005-2009. Chart 4-4: Historical Volume Movement - CIS and Russia 40,0000 35,0000 Volume (kg)

30,0000 25,0000 20,0000

Russia

15,0000

Ukraine

10,0000

Latvia Lithuania

5,0000 0

2007

2008

2009 Source : HVA Foods Limited

A detailed country wise break up of export volumes is provided in the above chart. As can be observed, Russia takes the forefront, with other countries within the region remaining comparatively insignificant. For example, in 2009, a significant 83% of total exports to this region comprised of exports to Russia. The forecasted revenue and exported volumes from 2010 to 2014 for the CIS and Russian Federation are presented below. Table 4-3: CIS and Russian Federation: Forecasted Movement of Values and Volumes Exported CIS and Russian Federation Value (USD) Average Rate (USD) Volume (kg)

2010 2,085,000 6.45 323,007

2011 2,256,000 6.45 349,538

2012 2,368,000 6.45 366,965

2013 2,547,000 6.45 395,063

2014 2,728,000 6.45 423,189

Source: HVA Foods Limited

As per the forecast, the gross projected revenue from this region is expected to witness a moderate CAGR of 7.03% over the next five years. It should be noted that a price rate increase has not been incorporated within the individual markets of the region over the forecasted period. Thus with the export mix remaining fairly constant over the projection period; the growth in revenue from 2010-2014 denotes that represented by an increase in export volumes. According to the management, the CIS and Russian Federation region is presently saturated with many brands leading to increased competition. Many leading brands within these markets use multi origin teas to average their tea prices on final blends used for value added products. Furthermore, in Russia presently, duty on bulk tea imports stand at 0%, whilst the duty on value added tea stands at 20%. Thus with such a disparity in duty rates, more and more companies are shifting from importing value added tea to importing bulk tea and also setting up plants in Russia itself to cut down on their packaging costs. However, with Russia entering the World Trade Organization (WTO), the tariff rates could ease in the future.

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Far Eastern Region “HELADIV” brand is currently distributed in Japan, Singapore, Thailand, Malaysia, Philippines, China and Taiwan. Japan is presently the largest market for “HELADIV” products within this region. The Japanese tea industry remains fragmented, with many players, of which brands such as Itno En and Nittoh remain market leaders holding close to 20% market share. The remainder is split across a large number of players including Lipton, Fukuju En, Harada, Twinnings and House of Foods. Thus “HELADIV” market share in Japan remains modest. According to the Euromonitor International Report on Hot Drinks Market, tea in Japan is a mature and saturated sector, with consumer demand mainly stemming from the fruit/herbal tea category, which is gaining further recognition among tea drinkers. Especially the younger generation is increasingly shifting away from hot tea towards RTD tea, creating markets for innovative brands such as “HELADIV”. The report projects a total volume growth of 1% for the Japanese market. The Far Eastern region is a growing market for “HELADIV” products, and according to the management, consumers within this region are generally less price conscious and appreciate a wider product range and innovative tea products. Table 4-4: Far Eastern Region: Historical Movement of Values and Volumes Exported Far Eastern Region Value (USD) Volume (kg)

2005 184,600 17,497

2006 248,224 26,762

2007 301,652 31,243

2008 392,832 38,420

2009 446,875 40,372

Source: HVA Foods Limited

Both volumes and value of exports to this region have witnessed a continuous growth over the past several years. In terms of revenue from this region, a CAGR of 24.7% had been achieved from 2005-2009. Chart 4-5: Historical Volume Movement - Far Eastern Region 40,000 35,000 Volume (kg)

30,000 25,000 20,000 15,000 10,000 5,000 0

2007

2008

2009

China Japan Malaysia Singapore Taiwan Thailand Australia Philippine

Source : HVA Foods Limited

As shown in the above graph, Japan is the largest export market for “HELADIV” products in the Far Eastern region and on average has accounted for 75% of the total volumes exported to the region over the past several years. With regard to Japan, the Company directly sells to a supermarket chain which provides for the comparatively high volumes exported. The significance of Japan has however declined from 2005, where it accounted for 83% of total Far Eastern export volumes to 45% in 2009 as other markets like China have shown promise. The Chinese market has experienced a significant 49% growth in volumes from 2005 to 2009. According to the management, Japan and Singapore are considered as premium markets, with consumers willing to pay a premium price for the “HELADIV” product range. With China’s economy growing and disposable income levels rising, China too is expected to become a premium market, with discerning consumers willing to pay higher for quality. The forecasted revenue and export volumes for the Far Eastern region from 2010 to 2014 are presented below.

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Table 4-5: Far Eastern Region: Forecasted Movement of Values and Volumes Exported Far Eastern region Value (USD) Average Rate (USD) Volume (kg)

2010 515,000 6.98 73,824

2011 577,500 6.84 84,485

2012 628,500 6.70 93,794

2013 702,000 6.44 109,059

2014 810,000 6.31 128,382

Source: HVA Foods Limited

With increased interest in the Chinese market, HVA Foods Limited is expected to adjust their export mix in this region accordingly. Given below is a forecast provided by the Company. Table 4-6: Far Eastern Region: Forecasted Export Mix 2010 34.0% 54.0% 1.0% 2.0% 1.0% 8.0% 100.0%

China Japan Philippines Singapore Taiwan Thailand

2011 37.0% 50.1% 1.0% 2.5% 1.0% 8.4% 100.0%

2012 40.0% 45.8% 1.3% 2.5% 1.1% 9.4% 100.0%

2013 45.8% 40.5% 1.3% 2.7% 1.1% 8.6% 100.0%

2014 48.7% 36.7% 1.4% 2.7% 1.4% 9.2% 100.0%

Source: HVA Foods Limited

As seen above, the significance of Japan in terms of volumes sold within the region is expected to decline with the Chinese market increasing in significance over the projected period. Japan’s share of export volumes to the Far Eastern region is expected to fall to 37% in 2014. The decline in significance comes amid a modest growth being projected for the Japanese market. Revenue from the overall Far Eastern region is expected to grow by a CAGR of 12% over the forecast period, on the back of export volumes increasing by a CAGR of 14.8%. Table 4 -7: Cumulative Export Values, Volumes, and Average Price Comparison 2009 vs. Forecasted for 2010 Far Eastern region Value (USD) China Japan Philippines Singapore Taiwan Thailand Total

67,331 338,183 13,929 3,599 23,832 446,874

2009 Volume (kg) 4,750 30,609 1,179 405 3,429 40,372

Avg. Price (USD) 14.18 11.05 11.81 8.89 6.95 11.07

Value (USD) 100,000 340,000 5,000 15,000 5,000 50,000 515,000

2010 Volume (kg)

Avg. Price (USD)

25,000 40,000 588 1,765 588 5,882 73,823

4.00 8.50 8.50 8.50 8.50 8.50 6.98

Source: HVA Foods Limited

A comparison of forecasted price rates for 2010 for the Far Eastern region, with those achieved in 2009, indicate that the rates projected for 2010 are significantly lower, especially with regard to China. Overall average prices within the Far Eastern region are expected to fall by 37% in 2010, with average price rates in China alone expected to decline by a notable 72%. With China being a tea producing country, presently there are many established brands within the country which leads to heavy competition being faced by companies like HVA Foods Limited in increasing market HVA Foods Limited – Initial Public Offering |

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share. Even though “HELADIV” branded products have been in the Chinese market for some time, it has been recognized that the Company had not been able to identify the right partners to enter the Chinese market on a larger scale. According to the management, since 2008 they have identified two parties with strong financial and marketing backgrounds to drive the brand in China. One party is concentrating in Retail & Horeca markets (a sector of the food service industry, which includes establishments which prepare and serve food and beverages) in Shanghai, Beijing, Nanjing. The other party is investing in its own specialty tea shops as well as promoting “HELADIV” on large scale to retail markets in the southern part of China. Their projects are expected to boost sales during the coming years, primarily focusing on the “HELADIV” tea bag range. With the management anticipating to grow the retail Chinese market and capitalize on product availability and brand awareness, the comparatively lower rates projected are primarily due to a penetration strategy adopted to actively capture the market. Export volumes to China are forecasted to record a CAGR of 26% over the period from 2010-2014. The Company has introduced “HELADIV” products to the Philippines market in 2007. By 2008, the presence of “HELADIV” products had increased with the Company shipping approximately USD 50,000 worth of “HELADIV” products per quarter to the Philippines. However in 2009, with increased competition from international brands, in particular Twinings of London, the Company had lost significant market share. Twining presently is the most popular brand in Philippines dominating almost 40% of the retail shelves in terms of imported brands. In 2010 and going forward, the Company intends to re-energize marketing efforts to recapture the Philippines market. The Company has planned to participate in trade fairs which should provide opportunities for the Company to identify new distributors and modes to expand its market share.

Middle Eastern Region HVA Group is mainly involved in exporting tea in bulk to this region. The main markets are Syria, Iran, Lebanon, UAE, and Iraq. However, “HELADIV” products are presently not exported to this region, where the market appetite still appears to be for bulk and not value added tea products.



Europe and U.S.A. This region consists of untapped markets for “HELADIV” products except for a minimal quantity that is shipped under the “HELADIV” brand to Belize and United States via consolidators. In terms of competition, 70% of the market consists of major brands such as Lipton, Twining, Tetly, Ahmad Tea, Harrods, Bigelow, Celestial Seasoning and the rest with a range of small brands owned by leading tea producing nations. The Company has approached SUPERVALU and COSCO which are the largest distribution channels in the U.S. According to the management the requirement of warehousing and setting up a liaisons office is presently being explored. As can be observed from the table below, the presence of “HELADIV” products within this region has been comparatively negligible though growing in significance over 2008 and 2009. Table 4-8: Europe, Americas and African Region: Historical Movement of Values and Volumes Exported Europe, Americas and African Region Average Rate (USD) Volume (kg) Source: HVA Foods Limited

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| HVA Foods Limited – Initial Public Offering

2005 1,680 65

2006 -

2007 1,386 50

2008 31,590 2,477

2009 29,112 3,327

Chart 4-6: Historical Volume Movement - Europe & Americas 140,000

Volume (kg)

120,000 100,000

Europe

80,000

Americas

60,000 40,000 20,000 0

2007

2008

2009 Source : HVA Foods Limited

As shown above, the European region has outperformed the American market and has achieved significant growth in 2009. The forecasted revenue and volumes for the Europe and Americas region from 2010 to 2014 is presented below. Table 4-9: Europe, Americas and African Region: Forecasted Movement of Values and Volumes Exported Europe, America, and Africa Export Value (USD) Average Rate (USD) Volume (kg)

2010 28,850 5.01 5,754

2011 37,500 4.92 7,625

2012 45,250 4.84 9,354

2013 53,500 4.79 11,167

2014 70,500 4.74 14,875

2012 95% 5% 100%

2013 95% 5% 100%

2014 95% 5% 100%

Source: HVA Foods Limited

Given below is a forecast of the export mix from 2010 – 2014. Table 4-10: Europe, Americas and African Region: Forecasted Export Mix 2010 92% 8% 100%

Europe U.S.A.

2011 94% 6% 100%

Source: HVA Foods Limited

Revenue from this region is expected to witness a CAGR of 25% over 2010-2014. With average rates expected to fall over the forecast period, the growth in revenue is mainly driven by an increase in export volumes from 5,754kg in 2010 to 14,875 kg in 2014 (CAGR of 21%). Table 4-11: Cumulative Export Values, Volumes, and Average Price Comparison 2009 vs. Forecasted for 2010 Value (USD) Europe U.S.A. Total

28,405 708

2009 Volume (kg) 3,304 22.5 3,326.5

Avg. Price (USD) 9.15 31.47

Value (USD) 27,500 1,350

2010 Volume (kg) 5,416 338 10,933

Avg. Price (USD) 5.50 4.00

Source: HVA Foods Limited

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As seen in the table above, a significant decline in average USD prices is expected in 2010. As per management representation, with the region largely untapped, the Company anticipates having to offer a competitive price structure so as to entice distributors within the region and capture sustainable market share. The U.S.A. has been a difficult market for the Company to enter as local brands dominate the retail shelves of super markets offering a large product assortment. As per the management, the inability of Sri Lankan brands to enter the market has primarily been due to the requirement of substantial investments for advertising, shelf space, storage and due to local brands sourcing tea from Argentina where tea prices are almost 60% lesser than Ceylon tea. Unlike Far East, Russia, Middle East and European markets, the quality of tea is given less consideration in the U.S, with flavoured teas and tea infusions being most popular within the market. The Company has identified Cyprus and Germany as its main markets in Europe. Even amid a loss of market in 2009, the management remains optimistic of re-gaining market share in Cyprus in 2010. As per the management, the Company is currently in negotiation with several prospects to recommence representation of “HELADIV” products in Cyprus. Through a well planned entry strategy and with a strong distribution partner, the management believes the Cyprus market could be recaptured, contributing considerably to the export market. According to Euromonitor International reports, with Germany witnessing an increasingly obese and ageing population, health concerns seem to be the driver of consumer demand. “HELADIV” currently competes within the German black tea market. In the German market, black tea is the favourite accounting for close to 77% of German consumption, with the balance consumption being Green tea. China presently dominates the German market in black tea supplies with an approximately 16% market share, while Sri Lanka stands close behind with a market share of approximately 14%. The German market remains concentrated with major brands namely like Teekanne, Messmer and Milford, holding over 50% of the market share. Over the coming years, the Company expects to grow the retail market and capitalize on product availability by achieving a CAGR in volumes of 10% by 2014.

New Markets Over the forecast period HVA Foods intends to enter two new markets namely; Maldives and Malaysia. Revenue from the new markets is expected to amount to USD 2,000 in 2010 projected to witness a substantial CAGR of 38% over the next five years. However, the contribution from such markets to the total projected revenue is expected to be negligible amounting to just 0.08% of total revenue in 2010 and gradually increasing up to 0.28% by 2014. Table 4-12: New Markets: Forecasted Movement of Values and Volumes Exported New Markets Value (USD) Average Rate (USD) Volume (kg)

2010 2,000 8.50 235

2011 3,250 8.50 382

2012 5,000 8.50 588

2013 7,500 8.50 882

2014 10,000 8.50 1,176

Source: HVA Foods Limited

Table 4-13: Market Wise Breakup of Export Volumes Forecasted to be Generated from New Markets USD Maldives Malaysia Source: HVA Foods Limited

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| HVA Foods Limited – Initial Public Offering

2010 1,000 1,000

2011 1,750 1,500

2012 2,500 2,500

2013 4,000 3,500

2014 5,000 5,000

With regards to Maldives, the management is expecting to target the strong Horeca market. Thus with high potential for the “HELADIV” Ice Tea range which will be channeled to mainly hotels, the Company has presently initiated distribution with an identified distributor. According to the management, at present Malaysia mostly consumes low grade tea dust with flavours which are imported as bulk tea and packed within the country. It is believed that considerable potential lies in Malaysia for affordable quality flavoured teas especially in the form of tea bags. Thus, the management initially anticipates to enter the Malaysian market primarily with a product assortment of flavoured tea bags.

4.4

Competition Given below is a table which shows the top ten value added tea exporters by volume. Table 4-14: Top Ten Sri Lankan Exporters of Value Added Tea Exporter Akbar Brothers Group Jafferjee Brothers Group CTM Group Expolanka Teas Union Commodities MJF Group Stassen Group James Finlay Group Imperial Tea Exports Sunshine Tea

Quantity 24,687,305 10,074,637 7,792,804 6,796,480 6,492,146 5,483,989 4,769,048 4,258,959 4,253,045 2,761,337

% of Tea Packets 83.3% 80.4% 89.4% 94.4% 27.9% 27.0% 85.1% 92.9% 90.8% 35.1%

% of Tea Bags 14.5% 11.3% 2.5% 4.5% 2.6% 61.9% 10.6% 7.1% 4.9% 11.9%

% of Blended Tea 2.0% 0.09% 8.0% 0.05% 69.4% 0.07% 1.5% 2.8% 52.9%

% of Instant Tea & Other 0.2% 5.1% 0.02% 1.0% 0.09% 11.0% 2.7% 1.5% 0.10%

Source: Tea Data Book – 2009

Compared to its competitors HVA Foods Limited has exported only 604,472 kg of value added tea. Given below is the breakup of sales based on the product line. Chart 4:7- Break up of Sales based on Product Line

22.00%

58.00%

Tea Packets...................................................58.00% Tea Bags .........................................................20.00% 20.00%

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

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However, it should be noted that most of these companies mentioned above have been operating in the trade for a long time. Moreover, most competitors in value added tea segment are packing for third party brands while HVA Foods Limited packs its entire production quantity under their own brand. What should be highlighted is that while the export volume of value added tea in the industry declined by 9.4% the Company’s volume has increased by a significant 18%. It is expected that the outlook for the Company will be better in the future with the introduction of new products and markets.

4.5

Degree of Dependence on Key Customers and Suppliers “Aroomat”, a distribution company based in Moscow, Russia accounts for approximately 35% of the total sales of “HELADIV” products. The balance sales revenue is being distributed among a diversified client base.

4.6

Details of Material Indebtedness The details of Term Loans of HVA Foods Limited as at 03rd January 2011 are as follows. Table 4-15: Loan Facilities – HVA Foods Limited Name of Bank

Facility

Value of Facility

Outstanding as at 03/01/2011

Amount repayable within 01 Year

Amount Repayable After 01 Year

Seylan Bank (1)

Term Loan – USD

1,170,000

1,000,000

770,000

300,000

Bank of Ceylon

Term Loan – LKR

10,000,000

10,000,000

10,000,000

Settle through IPO proceeds

Seylan Bank

Overdraft

5,000,000

Bank of Ceylon

Overdraft

4,000,000

Working Capital

5,000,000

-

625,000

4,375,000

Mrs. V.S. Amunugama Fernando

6,935,878

3,467,939

3,467,939

Mr. A.R.H. Fernando

2,000,000

2,000,000

-

Lake Drive Holdings (Pvt.) Limited

4,640,406

2,320,203

2,320,203

Lease Facility Mercantile Investments Limited Related Party Loans (2)

Short Term Borrowings (2) Packing Credit Loan Bank of Ceylon

USD

170,176

170,176

Seylan Bank

USD

208,089

208,089

HSBC

USD

210,460

210,460

Bank of Ceylon

USD

301,061

301,061

Seylan Bank

USD

811,355

811,355

HSBC

USD

39,525

39,525

Bills Negotiation

* Note: The Company has applied for a loan facility of LKR 10 Mn from Bank of Ceylon which was pending at the time of printing of this Prospectus. However, provided the loan being granted, the Company expects to settle it through the IPO proceeds

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| HVA Foods Limited – Initial Public Offering

(1) T he Company expects to settle only a portion of the Seylan Bank loan. Please refer Section 3.5 (ii) for settlement amount. (2) A  ll related party loans and remaining short term borrowings after settlement through IPO, will be settled through internally generated funds. Please refer Note 28 of the audited financial statements for the year ended 31st March 2010 for information regarding loan facilities that have been rescheduled by banks. Also note that the borrowing costs are recognized as an expense in the period in which they are incurred, except to the extent where borrowing costs that are directly attributable to the acquisition, construction, or production of an asset that takes a substantial period of time to get ready for its intended use or sale, are capitalized as part of that asset. As at 03rd January 2011 there were no mortgages or charges on the assets of the Company other than the mortgages and charges disclosed under Note 21 to the audited financial statements of HVA Foods Limited set out in this Prospectus.

4.7

Working Capital The Board is of the opinion that the working capital is sufficient for the purpose of carrying out day to day operations of the Company. However, for future business expansions, the Company intends to utilize a part of the proceeds of the Offering contemplated herein as set out in Section 3.5

4.8

Dividend Policy The Company has not paid any dividends on its Ordinary Shares in the past as the Company has incurred losses during its initial years of operation. However, in view of a turnaround in profitability the Company intends to pay dividend going forward.

4.9

Litigation, disputes and contingent liabilities There are no material legal, arbitration or mediation proceedings pending against the Company as at 30th September 2010 that would materially affect the current financial position or future operations or profits of the Company. The Company was not involved in any legal, arbitration or mediation proceedings in the recent past which had any significant effects on the Company’s financial position or profitability. As at 30th September 2010, there are no penalties imposed by any regulatory or state authority against the Company. The following contingent liabilities exist on behalf of the following company as at 31st March 2010. Company Name *HVA Lanka Exports (Private) Limited HVA Lanka Exports (Private) Limited HVA Lanka Exports (Private) Limited

Bank Lankaputhra Development Bank HSBC HSBC

Guarantee Primary mortgage Corporate guarantee Issuance of guarantee

Amount (LKR) 130.0 Mn 26.9 Mn 0.5 Mn

* T he land and factory building that have been pledged against the Lankaputhra Development Bank are shown as an asset on the books of HVA Foods Limited while the loan component is shown as a liability on the books of HVA Lanka Exports (Private) Limited. However, it should be noted that the land and the building are being used on a shared basis by both HVA Foods Limited as well as HVA LankaExports (Private) Limited and the funds from the loan proceeds have been applied for improvement of such shared facilities.

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4.10

Patents, Trade marks and Brands Owned by the Company HVA Foods Limited has the local brand rights for its brand “HELADIV” while HVA Holdings (Private) Limited; now a 100% owned subsidiary of HVA Foods Limited has the international brand rights. Internationally, the brand name has been registered in 42 countries. Furthermore, the Company is also expecting approval for its subbrand “INFINI-T” in the near future.

4.11

Share Transfer of HVA Holdings (Private) Limited to HVA Foods Limited The international brand rights of the “HELADIV” brand is owned by HVA Holdings (Private) Limited which was a fully owned subsidiary of Lake Drive Holdings (Private) Limited. A Board resolution was passed on 29th September 2010 by HVA Foods Limited to transfer Eighteen Thousand Three Hundred and Sixty Seven (18,367) ordinary shares held by Lake Drive Holdings (Private) Limited to HVA Foods Limited. A Share Sale and Purchase Agreement was entered into by the two parties on the 29th September 2010 and as per the agreement a sum of Sri Lankan Rupees Forty Five Million (LKR 45,000,000) in consideration of the transfer will be paid on or before 31st January 2011. Hence, HVA Holdings (Private) Limited is now a fully owned subsidiary of HVA Foods Limited. HVA Holdings (Private) Limited has the international ownership rights of the “HELADIV” brand. It has no other business operations, assets or liabilities. Given below is the ownership structure of HVA Holdings (Private) Limited from incorporation to date. Table 4-16: Ownership Structure of HVA Holdings (Private) Limited Mr. A.R.H. Fernando Mrs. V.S. Amunugama Fernando Dothodana Jayantha Gunawardena Vallibel Holdings (Pvt.) Ltd. HVA Lanka Exports (Pvt.) Ltd. Lake Drive Holdings (Pvt.) Ltd. HVA Foods Limited

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No. of Shares 01 01 1,000 9,368 18,367 18,367 18,367

Transferred Transferred Transferred Transferred Transferred -

5.0 TEA INDUSTRY 5.1

History The origin of Sri Lanka’s tea industry dates back to the year 1824 with the first tea plant brought to Ceylon by the British from China. However, tea planting for commercial purposes began in 1867 when James Taylor started the first tea plantation in Kandy. Since then tea production has been increasing even further with the then existing coffee estates also being converted to tea plantations. By 1927, tea production in the country exceeded 100,000 metric tons, which was almost entirely exported. By 1965, Sri Lanka became the world’s largest tea exporter for the first time. During 1971–1972, the government of Sri Lanka nationalized the tea estates owned by the British companies and the Sri Lanka Tea Board was founded to supervise these acquired estates. In 1976, Sri Lanka’s tea industry marked a milestone with the commencement of exports of tea bags. Since then the Sri Lankan tea industry has grown in strength to become a vital component of the economy.

Overview – Contribution to the Economy The tea industry in Sri Lanka plays an important role in the Sri Lankan economy. It is one of the major sources of foreign exchange earnings and a top contributor to export earnings. For the past several years, tea has been the third largest foreign exchange revenue earner behind garments & textiles, and workers’ remittances. Chart 5-1: Major Sources of Foreign Exchange Earnings 4,000 3,000 USD million

5.2

Garments & Textiles 2,000

Workers' Remittances Tea

1,000 0

Tourism 2005

2006

2007

2008

2009

Source : Central Bank Annual Report - 2009

The industry has also been a key contributor to total export earnings. Tea exports accounted for 16.7% of earnings in 2009 which was a 6.8% drop compared to 2008 mainly due to supply shortages. Table 5-1: Contribution of the Tea Industry to Export Earnings 2005 2006 2007 2008 2009

Share (%) 12.8 12.8 13.2 15.7 16.7

Source: Central Bank of Sri Lanka Annual Report – 2009

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5.3

Overview – Sri Lanka Tea Production Sri Lanka produces tea throughout the year and approximately 4% of the country’s land mass accounts for tea plantations. The tea growing areas are mainly concentrated in the central highlands and southern inland areas of the island. They are broadly grouped according to the elevations as high grown (above 1,200 meters), medium grown (between 600 to 1,200 meters), and low grown (up to 600 meters). High grown teas from Sri Lanka are reputed for their taste and aroma and are much sought after by blenders of tea importing countries. The medium grown teas provide a thick colour variety which is popular in Australia, Europe, Japan and North America. The teas produced in low grown areas are mainly popular in Western Asia, Middle Eastern and CIS countries. Tea planting is mainly done through private tea small holders and the Regional Plantation Companies. The small holders account for approximately 37.33% of the total extent of land under tea cultivation while the remainder is cultivated by the Plantation Companies. Sri Lanka mainly produces orthodox teas (95%) while a small portion is produced through other methods. In the orthodox process of production, semi dried green shoots are ruptured by rolling achieved from a rotary movement. The rolling process ruptures and twists the leaves. When tea leaves are crushed an oxidation process begins, which is followed by firing and commonly known black tea is produced. Unorthodox production process mainly includes the production of CTC (cut, tear, curl) tea. The production process begins by cutting the withered leaf into a uniform size by machines. Then the leaves are fed into metal rollers to be crushed, torn and curled. The extracted cell cap is collected and added to the leaves again. The crushed leaves are then oxidized, dried and sorted. Sri Lanka was the fourth largest tea producer in the world producing 289.7 Mn kg in 2009. Table 5-2: World’s Top Five Tea Producing Countries Country China India Kenya Sri Lanka Vietnam

2006 (Mn kg) 1,047.3 928.0 310.6 310.8 151.0

2007 (Mn kg) 1,183.0 949.2 369.6 305.2 164.0

2008 (Mn kg) 1,257.4 805.2 345.8 318.5 174.9

2009 (Mn kg) 1,358.6 978.9 314.2 289.7 154.0

Source: International Tea Committee – Annual Bulletin of Statistics 2010

Last year recorded a 9% drop in Sri Lanka’s total tea production due to unfavourable weather conditions and the work stoppages by estate workers. Chart 5-2: Tea Production in Sri Lanka for the Past Decade 330

Kg million

320 310 300 290 280 270

2000 2001 2002 2003

2004 2005 2006 2007

2008 2009

Source : Central Bank Annual Report - 2009

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The decline in tea production in 2009 was felt not only by Sri Lanka but by many other tea producing countries as well, which resulted in a drop of total world tea production by 2.2%. However, 2010 looks positive with cumulative figures for July standing at 195.1 Mn kg compared to 158.1 Mn kg in 2009 recording a 23% increase. This positive trend is expected to continue in the coming months as well, given good weather conditions and stronger world tea prices. Moreover, according to International Tea Committee reports, the gap between production of tea and consumption was 3.4% in favour of consumption for 2009. This is encouraging news showing that demand for tea remained robust despite the global economic recession depicting that consumption of tea is habit forming and is relatively price inelastic. Given below is a figure depicting the production process of black tea. Figure 5-1: Production Process – Black Tea PRODUCTION

MARKETING

CONSUMPTION

Green leaf suppliers (Plantation Companies and Small Holders)

Auction

Local & foreign consumers

Local & foreign buyers

State owned & private tea factories

The green leaf supplied by the plantation companies and the tea small holders are brought to the factories for processing and manufacturing of black tea. The finished product is then sold through the Colombo tea auction to local and foreign buyers. Part of the tea is consumed locally while bulk of the production is shipped to foreign countries by local and foreign owned export companies.

5.4

Tea Export Market Sri Lanka is considered to be the world’s second largest exporter with almost 90% of its total production being exported. Its export market is currently valued at approximately USD 1.5 Bn and has been able to maintain a global export share of 20% - 21%. Table 5-3: World’s Top Five Tea Exporting Countries Country Kenya * Sri Lanka China India * Vietnam

2006 (MT) 312,156 314,915 286,594 215,672 105,116

2007 (MT) 343,703 294,254 289,431 175,454 110,929

2008 (MT) 383,444 298,821 296,935 200,070 104,000

2009 (MT) 342,482 279,839 302,949 189,000 95,000

* Includes teas imported and re-exported; includes Green Tea but excludes Instant Tea Source: International Tea Committee – Annual Bulletin of Statistics 2010

Until recently Sri Lanka used to be the largest exporter in the world. However, in recent times Sri Lanka has encountered competition in retaining its position as the main source of Orthodox Black Tea in the world. Despite this, year 2010 looks positive with total export cumulative figure up to May showing a 7% increase

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from the same period the previous year. Even though Sri Lanka lost its’ number one position in exports, in terms of volume, it still continues to maintain its position as the world’s highest tea export revenue earner due to the ability to fetch higher prices than other export markets. Chart 5-3: Auction Price per kg 5.0 4.5

USD million

4.0

Jakarta Chittagong Cochin Kolkata Guwanati Mombasa Colombo

3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0

2004

2005

2006

2007

2008

2009

Source : Sri Lanka Tea Board

As shown above, Sri Lanka has continuously been able to fetch much higher prices for its quality tea. For example, in 2009, the average export price of tea reached a record high of USD 4.65 per kg which was an almost 10% escalation over the previous year. Further, the average price registered at auction level has seen an improvement of over 17% compared to less than 10% increase in all other countries. Presently, Sri Lankan tea exports reach approximately 137 countries. Of the main export destinations of Sri Lanka, Russia and the Middle Eastern markets remain the most important markets for Ceylon tea, absorbing 36% of all tea exports amounting to 106 Mn kg. Table 5-4: Sri Lanka’s Top Five Export Markets Country Russia U.A.E. Syria Iran Turkey Other Total

2005 57,648 38,180 27,670 24,948 17,241 143,172 308,859

%

2006

18.66 66,207 12.36 44,644 8.96 30,670 8.07 28,101 5.58 13,803 46.35 143,989 327,414

%

2007

20.22 56,725 13.63 44,221 9.37 27,649 8.58 32,254 4.21 14,817 43.97 136,087 311,753

%

2008

18.19 50,817 14.18 45,417 8.86 26,434 10.35 32,111 4.75 15,380 43.65 149,541 319,700

%

2009

15.89 45,711 14.21 31,177 8.27 29,499 10.04 28,625 4.81 15,904 46.77 198,739 289,655

% 15.78 10.76 10.18 9.88 5.49 68.61

Source: International Tea Committee – Annual Bulletin of Statistics 2010

5.5

Regulatory Environment The Sri Lanka Tea Board (“SLTB”) is presently the key governing body of the tea industry. SLTB provides a range of services to tea planters, tea manufacturers and tea exporters which include maintaining quality standards of tea, the marketing and promotion of Ceylon tea both locally and abroad, promoting investment in the tea industry etc. As a regulator, SLTB requires all tea planters, manufacturers and exporters to be registered under the Board in terms of the SLTB Regulations 1986 published in the Government Gazette Extraordinary No. 386/13 of 28th January 1986. SLTB has carried out a pivotal role in campaigning to ensure producer countries only ship teas that meet the ISO 3720 standard, in an attempt to prevent an abundance of low quality teas flooding the market. In 2008, major tea producing countries agreed to adhere to ISO 3720 as a minimum quality level to prevent oversupply from depressing prices. As such, SLTB as part of its role in maintaining quality, assesses quality standards at all points of disposal of made tea.

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Furthermore, SLTB grants the franchise rights of the Ceylon tea Lion logo which denotes not only the country of origin but also the quality of Ceylon tea. The logo can only be used by tea packs which contain 100% pure Ceylon tea. Sri Lanka Tea Board is the legitimate owner of the Ceylon tea Lion logo which has been registered in many countries around the world.

5.6

Value Added Tea Exports A few decades ago, Sri Lanka’s tea exports mainly consisted of black tea in the form of bulk tea. However, in 1982, with the government incentive package granted to exporters, a shift from supplying of bulk tea to value added packaged tea under exporters own brand names and/or buyer brand names was observed. These incentives helped establish an infrastructure that assisted brand building and manufacture of value added tea. Hence, today, Sri Lanka’s export profile is more diversified with the addition of value added tea segment which includes tea packets, bags, instant tea and other blended teas. Table 5-5: Volume of Sri Lankan Tea Exports 2006

Bulk Tea (Black & Green) Value Added Tea Total

Volume (Mn kg) 200.7 125.4 326.1

2007 %

Volume (Mn kg) 61.3 182.9 38.7 127.5 310.4

2008 %

Volume (Mn kg) 58.7 179.9 41.3 137.7 317.6

2009 % 56.3 43.7

Volume (Mn kg) 167.5 119.6 287.1

% 57.8 42.2

Source: Central Bank of Sri Lanka Annual Report – 2009

More than 50% of Sri Lanka’s tea exports still consist of bulk tea which fetched an average price of USD 3.67 per kg in 2009, while the prices of tea exports in value added forms ranged higher, between USD 5.36-7.53 per kg. However, Sri Lanka has recently benefited from well developed infrastructure facilities for value addition which has placed Sri Lanka far ahead of all other producer countries. Hence, the Sri Lanka Tea Board is expecting to increase the share of value added tea exports to 65% from current 40% - 42% levels within the next five years by assisting firms to market their brands overseas. Given below is a chart showing the production process of value added tea. Figure 5-2: Production Process – Value Added Tea

Receiving of teas at the warehouse

Blending

Flavouring

Packaging

Shipping

Upon purchase of teas from the auction and receiving the teas at the exporter’s warehouse, teas are blended in an automated blending machine as per the blending instructions given by the tea department. During the blending process, metal, fibre particles and other foreign matter are extracted and the tea is sifted to maintain uniformity in size of the product. If the teas are to be flavoured, it is done in specially designed stainless steel flavouring drums. This process takes place within a confined area on the factory to avoid cross contamination with other un-flavoured teas. This final blend of tea is then packed into various types of packaging to the liking of the consumers. The final packaging will be placed in master cartons to enable easy transport by sea or air.

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Given below is a list of the top 10 tea importing countries. Table 5-6: World’s Top Ten Tea Importing Countries Country Russian Federation & CIS Countries United Kingdom USA Pakistan Egypt UAE Morocco Iran Afghanistan Iraq Japan

2007 (MT)

2008 (MT)

2009 (MT)

246,372 131,152 109,396 106,366 69,000 58,540 52,500 56,100 44,000 32,000 47,303

257,260 129,759 116,749 99,116 107,000 60,540 48,200 61,600 40,300 39,500 43,107

259,630 120,136 110,861 85,655 77,600 54,550 53,700 50,500 46,900 43,800 40,222

Source: International Tea Committee – Annual Bulletin of Statistics 2010

As shown below, significant increases in demand for value added tea on a global context is also expected. An average YoY increase of 15% was observed in the segment of tea packets.

2009

Saudi Arabia

Lebanon

Ukrain

Kuwait

Iran

Turkey

Jordan

Iraq

Libya

2010

Russia

8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 (1,000)

Syria

MT

Chart 5-4: January-July 2009 Vs 2010 Tea Packet Imports

Source : Data One – Jan - July Data

Furthermore, according to the United Kingdom Tea Council, 96% of all cups of tea consumed daily in the UK is brewed from tea bags. The U.S. has also seen substantial growth in the consumption of value added tea. Growth was strongest in RTD bottled teas, large sized tea bags for food service vendors and flavoured and unflavoured specialty blends. According to the U.S. Department of Commerce, 80% of tea consumption in the U.S. consists of iced tea. The bulk of iced tea is brewed from tea bags which account for the largest share (65%) of tea sales at the retail level while RTD tea, instant tea and iced tea mix consisted of 19%, 11% and 5% respectively. Further growth is seen in Sri Lanka’s largest export market for tea, Russia. The average annual per capita tea consumption in Russia is 1 kg. Moreover, around 95% of the Russians drink tea and according to the Russian Association of Tea & Coffee, the consumption rate peaks during the winter season. During those times, half of the population consumes two cups of tea on a daily basis. With regard to the consumption of value added tea, Russia repeats the pattern of the European tea market. The share of tea bags in the Russian market currently accounts for approximately 20% and it is expected to increase further with the increasing per capita income and more discerning taste.

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6.0 SRI LANKAN FAST MOVING CONSUMER GOODS INDUSTRY (FMCG) An overview of the Fast Moving Consumer Goods (FMCG) industry is discussed in the sections below as the Company is currently selling their tea extract based products to the local and export market. This product category includes iced tea, body gel, mouth wash, tea bath, food grade dye and concentrated cordial. The FMCG sector mainly focuses on manufacturing and marketing branded goods in the personal care, health care, and food & beverages categories. The overall FMCG industry grew by 9% during 2009 to LKR 114 Bn (Source: AC Nielsen, LMRB) while total private consumption grew by 0.6%. However, Private Consumption Expenditure (PCE) as a percentage of GDP decreased to 64.3% from 70% in 2008 while PCE on food, beverages and tobacco grew by 1.7%. Despite the slight decrease last year, the food, beverages and tobacco sector has always been the highest contributor to total Private Consumption Expenditure. Table 6-1: Composition of Private Consumption Expenditure at Current Market Prices Share of Total PCE (%) Item

2007

Food, Beverages, and Tobacco Clothing and Footwear Housing, Water, Electricity, Gas Furnishings, Household Equipment Health Transport Leisure, Entertainment and Culture Education Hotels, Cafes, and Restaurants Miscellaneous Goods and Services Expenditure Abroad of Residents

41.0 6.4 11.1 6.2 1.7 19.2 3.6 0.1 1.6 4.2 8.9

2008 37.8 5.7 12.7 5.8 1.8 21.8 3.6 0.1 1.5 4.9 7.7

2009 38.2 5.6 12.0 5.9 2.2 21.1 2.9 0.1 1.5 5.5 8.1

Source: Central Bank of Sri Lanka Annual Report – 2009

As shown below, Sri Lanka has comparatively recorded higher consumption expenditure as a percentage of GDP. Table 6-2: Comparative PCE Performance 2009

Sri Lanka

PCE as a percentage of GDP (%)

67.2

India 55.5

Singapore 39.6

Malaysia 45.6

Source: Central Bank Annual Report - 2009

6.1

Drivers of Growth of the Sri Lankan FMCG Industry (1) G  rowth in consumption expenditure & increase in disposable income – Growth in GDP is the main driver behind the increase in consumption expenditure and disposable income. Sri Lanka’s GDP per capita, at market prices, has increased from USD 981 in 2003 to USD 2,053 in 2009.

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Chart 6-1: Per Capita GDP at market prices (USD) 3,000

LKR million

2,500 2,000 1,500 1,000 500

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source : Central Bank Annual Report - 2009

For 2010, the Central Bank is projecting a 7% GDP growth due to positive effects on the economy after the end of the 30 year insurgency. This would assist in having an even more positive impact on consumer expenditure. Chart 6-2: GDP (percent change) 10% 8% 6% 4% 2% 0%

2002

2003

2004

2005

2006

2007

2008

2009 2010(E)

Source : Central Bank Annual Report - 2009

(2) T he trend towards increased urbanization has also helped drive the growth in the FMCG industry through the change of form of shopping. According to a survey done by A C Nielsen in 2006, an increased number of customers were switching to modern trade and spending more money on super markets compared to traditional convenience stores. Chart 6-3: Share of Trade 100%

Percentage

80%

Modern Trade

60%

Traditional Trade

40% 20% 0%

2004

2005

2006

Source : A C Nielsen - Survey of Retail & Shopper Trade

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Moreover, recent surveys done by Unilever and other companies reveal that modern trade has grown by about 20% - 30% over the last three years and is expected to continue the same trend. This trend is evident through the increase in supermarkets which indicates a clear change in consumer preference. Table 6-3 Growth in Number of Sri Lankan Super Markets/Organized Retail Channels Supermarket

2005

Cargills Keells Arpico Laughs

6.2

2009 94 21 6 9

136 41 26 10

Global Soft Drinks Industry The soft drinks industry could be broadly categorized into two groups; namely carbonated and noncarbonated drinks. Carbonated drinks are drinks that have added carbon dioxide like soft drinks which include colas, sodas, and fruit flavoured carbonates. According to a recent study done by Euromonitor, the global soft drinks market was valued at USD 479 Bn in 2009 and is projected to grow at a CAGR of 3.1% to reach USD 556 Bn in 2014. They have also predicted the carbonated soft drinks market would have a value of USD 189.8 Bn by 2014 while the global non-carbonated market to reach a value of USD 366.2 Bn depicting a clear shift in consumer tastes. Given below is a table showing the global soft drinks market segmentation by value. Table 6-4: Market Share of Global Carbonated Soft Drinks Category Carbonates Bottled water Juices RTD tea & coffee Functional drinks Concentrates Total

2004 Market Share (%) 46.80 18.40 14.90 8.50 7.60 3.90 100.00

2009 Market Share (%) 40.00 20.88 14.46 11.98 8.20 4.48 100.00

Source: Datamonitor

Consumers are seeking increased variety in their beverages and there is a growing awareness among the public with regards to the ingredients of the products and health and wellness issues in general. Hence, as shown above, this interest has resulted in a decline in consumer demand for carbonated soft drinks and an increased demand for non-carbonated drinks. Even among the non-carbonated soft drinks, Ready To Drink (RTD) tea continues to perform well in terms of market penetration. The table below shows the growth rates for 2009 and the expected figures for 2014. Table 6-5: Forecast Growth Rates for Non-Carbonated Drinks Category Bottled water Juices RTD tea & coffee

2009

2014 (Forecast) 6.9% 4.0% 9.0%

3.9% 5.2% 12.0% – 15.0%

Source: Datamonitor

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6.3

Ready to Drink Tea (RTD Tea) Ready To Drink tea includes any type of tea that could be consumed without any further processing. RTD tea has recently become very attractive due to the combination of many of the attributes that consumers look for in beverages; natural healthiness, fruit flavours and anti oxidants, etc. Its convenience is another predominant factor driving its popularity. RTD tea in bottles, cans, aseptic packaging, plastic containers, or any other packaging configuration brings the ultimate in convenience to consumers. Since ease of preparation has not been a strong selling point for tea, marketing of tea in the U.S. and other European countries has been a challenge. However, with the introduction of RTD tea, this difficulty has dissipated and thereby increasing market share of consumption of tea. Shown below are the global growth rates for RTD tea for the past several years. Table 6-6: Growth Rates for RTD Tea 2004

2005

2006

2007

2008

2009

2.6%

15.4%

26.2%

15.1%

1.7%

5.0%

Source: Datamonitor

A 5% growth rate in 2009 is commendable when compared to only a 1.5% growth rate in the overall carbonated soft drinks industry due to the recessionary conditions in the global markets. Moreover, the top three markets which constitute 70% of the global demand for RTD tea are China, Japan, and the U.S. Hence, companies exporting to these countries are strategically well positioned to make use of these growing markets.

6.4

Global Personal Care Industry A concern for healthy skin is seen to be a global trend. With an ageing population and increased concerns of the long-term effects of the sun, there has been much growth in skin care products. With the increase in disposable income, consumers seek products that are healthy and beneficial to them. The global growth of personal care categories was measured at 5%. According to a study conducted by A C Nielsen, given below are some of the growing trends in the personal care industry. • Bath and shower gels are growing faster than standard toilet soap globally and within every region. • Hair care and skin care regimes were seen as an important component to beauty and grooming. • Mouthwash/oral rinses/antiseptics has seen a growth of 12%. Personal care industry remains an attractive sector with global retail sales of USD 300 Bn realizing a growth rate of 4.5% over the past five years. However, with increased concerns over health risks, many companies are shifting their focus to natural and organic products. In most of the countries the demand for organic products has been rising steadily due to the growing consumer awareness and changing lifestyles. This has increased demand for products made from tea and it’s by products. It is now safely presumed that tea contains beneficial properties to improve the skin. As a result, a few reputed manufacturers of beauty care products have incorporated tea extracts in their anti ageing creams, head and body shampoos, facial masks for cleansing and tea baths for immersing. Although details of marketing and sales are not readily available the proliferation of spas and beauty salons in addition to the up market hotels form the clientele for these products. These also have an extension to catalog marketing and duty free sales on air lines. It can be safely assumed that the tea extracts in the beauty care segment is a multibillion dollar industry worldwide. Further, despite many sectors showing signs of maturation in developed markets, innovation remains high and with further economic prosperity, this sector is expected to show more positive growth trends.

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7.0 FUTURE DIRECTION AND PROSPECTS 7.1

Future Direction and Prospects The Company’s long-term objective is to become one of the most recognized and respected tea brands in the world. In order to achieve this, the Company plans to consolidate the brand in countries where there is already a presence whilst endeavoring to increase the market share. In this regard an aggressive marketing campaign will be launched from the beginning of 2011 to attract new buyers/agents particularly in countries where representation is not significant. It has been predicted by international financial monitors that Russia and CIS region will be one of the key growth sectors for tea during the next few years. “HELADIV” brand, having been established in Russia and Ukraine will expand its reach in other CIS countries such as Kazakhstan, Belarus, Azerbaijan, Uzbekistan, Georgia etc. Russia at present consumes approximately 240 million kg of tea per annum out of which Ceylon tea share is approximately 50-60 million kg. It is the aim of the company to increase its market share by as much as 25% year on year in this region. Neighbouring India is also a major tea consuming country. However, tea imports into India for consumption are restricted with non-tariff barriers favouring protectionism for agriculture. The FTA between India and Sri Lanka will be useful for establishing a joint venture particularly for a chain of tea cafes and boutiques. The company believes that focusing on this mass market in India will have positive results for “HELADIV” brand in the near future. In the Western hemisphere, the American market has potential for tea variations, other than normal tea bag business. The American market is fully saturated in mass market tea segment and does not have much room for profitability unless applied through multi origin tea blends. However, the ready-to-drink Ice Tea has the best potential, with American tea consumption in all categories representing 80% in RTD tea. Tea variations with the inclusion of herbs and tea applications in the life style product category similar to the Body Shop will be pursued through showcasing the Company’s products at strategic exhibitions in the US. It is also the vision of the Company to have offices in strategic markets. In order to fulfill tea requirements from other origins, the Company has already initiated a programme for joint ventures in India, Indonesia and Vietnam. In the next few years these strategic partnerships will be enhanced to undertake marketing in multi origin teas. Strategy will be focused primarily to project the goodness of tea from other origins in the specialty range such as the Darjeeling’s from India, Keemun’s from China, Japanese Sencha etc. With the expansion of scope in Research & Development, the Company has attracted much interest from local and international enterprises for synergized operations. Some of the international interest revolves around the development of pharmaceutical products based on the lab trials done by the Company’s Research & Development department. Initial discussions with Asian Development Bank has given a clear indication to private sector funding for future development of tea related projects which will have benefits to the industry. The Government of Sri Lanka has recognized Research & Development as an integral part in developing the national economy. It is expected that special grants or incentives for Research & Development will be announced during the forthcoming budget. Furthermore, with effect from November 2010 a special Development Fund for promoting and marketing of tea will be initiated by the Sri Lanka Tea Promotion Bureau. This initiative will generate a minimum of LKR 1 billion per year over a period of 5 years and will be managed primarily by the private sector tea exporters. As a brand developer, HVA Foods Limited will be fully qualified to draw on this fund for any future requirement of financial assistance in the development of its brand name. Within the next 5 years of operation the company hopes to be a well recognized and well established tea brand in the world catering to beverage and non-beverage sectors harnessing the maximum potential in tea. However, it is of importance to note that the above mentioned future plans will hold provided that tea continues to be the most widely consumed beverage globally and Sri Lanka’s current dominant presence in the export market remains constant or improves. The risks associated with the Company and its business activities are mentioned in Section 8.0. However, the Company is positive in mitigating the risk factors due to the wide range of products available. HVA Foods Limited – Initial Public Offering |

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8.0 INVESTMENT CONSIDERATIONS AND ASSOCIATED RISK FACTORS 8.1

Risk Factors Prior to investing in the Offered Shares, prospective investors should pay particular attention to the fact that the Company and its business activities are subject to a number of risk factors which may be within or outside the control of the Company. The risk factors that follow may be considered material to investors in making an informed judgment on the Company. Since the Company’s presence is in the tea sector, the industry related risks are focused on the tea industry. If any of the considerations and uncertainties given below develop into actual events, the Company’s business, financial conditions or results of operations and prospects could be adversely affected and this may impact the market price of the Offered Shares. However, given the importance of the tea industry for the national economy, the Company’s business is expected to be sustainable in the foreseeable future.

8.2

Industry Specific Risks Unfavourable weather conditions and wage hikes – Being a rain fed plantation crop in Sri Lanka, tea depends greatly on weather for optimal growth. Therefore, changes in weather conditions would undoubtedly affect tea production. For example, in 2009, tea production decreased by 9.1% to 290 Mn kg compared to 2008. This was mainly due to the dry weather conditions in all tea planting districts. Moreover, it is assumed that the trade unions will agitate for wage increases at least every two years. The unions represent 50% of the organized workers on estates while the wage component accounts for 60% of the cost of production per kilo. This is considered to be the highest among all the tea producing countries. In 2009, there was a significant hike in the wages which resulted in a further increase in cost of production. Hence, the tea industry in Sri Lanka will always be vulnerable to wage hikes. However, the negative impact of wage hikes could be dissipated to some level, through linking of wages to productivity. Moreover, the wage cost is also expected to affect all other tea production countries as well. Import taxes and non-tariff barriers – Import taxes and non-tariff barriers by large tea consuming countries could have negative impacts on the industry by hampering profitability of the industry. Threat of foreign competitors - Even though there is ample demand existing currently and further increases expected, Sri Lankan exporters are threatened by foreign competitors. Foreign exporters have created their own brand names by partly exploiting the incentives granted by the government in 1982. They have been able to build their own brand names without much investment in plant and machinery on their part aided by local exporters. These very same foreign traders have become the biggest competitors to the exporters who have their own Sri Lankan brand names.

8.3

Company Specific Risks Availability and price increase of raw material – The main raw material for iced tea is BM Fannings. BM Fanning’s is a byproduct, treated as waste in the manufacturing process of converting green leaf in to made tea. Currently the availability of BM Fannings is approximately 40 million kilos per annum. Hence the availability of raw materials is abundant. The entry of new players to the market may increase the demand for BM Fanning’s and thereby move the current price up from approximately Rs. 30 per kg. However, HVA Foods Limited has taken this factor into consideration in their marketing and pricing strategies. Price increases of black tea and green tea which are the main raw materials for value added teas could create a dent in the company’s profit margins. Importing of orthodox teas from other origins for blending purposes is still not fully permitted in Sri Lanka. Hence price shifts at the Colombo Tea Auction should be carefully

54

| HVA Foods Limited – Initial Public Offering

monitored. However, CTC Teas which are used for the manufacturing of tea bags are allowed on a case by case basis to be imported for blending purposes. Hence this segment of the company business can be hedged against extra ordinary price hikes at the Colombo Tea Auction. It is also the ambition of the company to have representative offices in other tea producing countries outside Sri Lanka to monitor worldwide price fluctuation at origins. Market competition - The competition generated within Sri Lanka can create price under cutting in the supply chain of consumer ready goods. This has been experienced in the trading of tea in bulk, where the margins are currently averaging around 5%-6%. Similar situations can occur in the value added business and to a lesser extent in the registered brands sector with more branded players offering consumer ready products. However, “HELADIV” being marketed for over 10 years has established a strong and growing clientele and has moved from a “Push to a Pull” dominant consumer plateau. The in-house Research & Development department is constantly developing new products and packing systems and has implemented innovative strategies to stay several steps ahead of competition. This is a continuous ongoing process at HVA Foods Limited to minimize the risk from counterfeits and price cutting. Competition from similar products - Tea and coffee are the most widely consumed hot beverages while Ice Tea competes for a share in the soft drinks and carbonated drinks category. The Company is vigilant of the competition the other drinks offer and are closely following the market shift in different beverage categories. However, it is encouraging to observe that consumption of tea has increased during the last several years and the Ice Tea consumption has vastly expanded in the cold beverage sector eating into the carbonated soft drinks segment. Risk of dependence on one distributor - As at the last financials dated 31st March 2010, ‘Aroomat’ (a distributor in Russia) accounted for 35% of the revenue of the Company. Measures are being taken by the Company to reduce the dependency on ‘Aroomat’ as a key distributor, as HVA Foods Limited is in the process of expanding the distributor network in Russia. The risk is further diluted due to the long standing relationship the Company has had with this particular buyer and Aroomat has also placed a cash deposit of USD 150,000 as a guarantee. Risk of change in consumer habits – The Company could be faced with the risk of changes in consumer preference for value added tea products. However, with the introduction of the tea concentrate based and tea extract based products the Company is positive of mitigating the impact of the risks associated with changes in consumer habits. Moreover, globally, the trend of tea consumption is towards increased use of value added tea products than consumption of regular black tea. Hence, it is highly unlikely that the Company would be faced with such risks of changes in consumer behaviour. Risks faced due to product concentration - Value added tea products account for 99% of the revenue of the Company. However, due to the diversification among the products offered, there isn’t a reliance on any one product category. For example, as the ‘Pride of Ceylon’ being the largest single product revenue contributor, accounts for only about 15% of the total revenue of the Company. However, it should be noted that these risks are mitigated because of a diversified product range.

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55

9.0 CORPORATE STRUCTURE 9.1

The Board of Directors The Board of Directors guides and supervises the business and operations of HVA Foods Limited. The Board consists of two (02) Non-Executive Independent Directors, one Non-Executive Director (01) and three (03) Executive Directors including the Chairman. The Board has the power to appoint the Executive Directors including the Chairman. As at the date of this Prospectus, the Board comprises of the following six (06) Directors. Table 9-1: Details of HVA Foods Limited Board of Directors Name

9.2

Age

Mr. A.R.H. Fernando

55

Mr. J. Raddalgoda

39

Mr. H.J. Fernando

27

Mrs. V.S. Amunugama Fernando

41

Mr. N.C. Vitarana

79

Mr. J.H.P. Ratnayeke

61

Address No. 220, Lake Drive, Colombo 08 No. 8/4, Sri Jinarathana Mawatha, Ratmalana No. 220, Lake Drive, Colombo 08 No. 220, Lake Drive, Colombo 08 No. 14, Alwis Terrace, Colombo 03 995/7, Park Lane, Rajagiriya

Designation Chairman Executive Director Executive Director Non-Executive Director Non-Executive (Independent) Director Non-Executive (Independent) Director

The Board of Directors of HVA Lanka Exports (Private) Limited The Board of Directors of the holding company of HVA Foods Limited is as follows: Table 9-2: Details of HVA Lanka Exports (Private) Limited Board of Directors Name

56

Age

Mr. A.R.H. Fernando

55

Mrs. V.S. Amunugama Fernando

41

| HVA Foods Limited – Initial Public Offering

Address No. 220, Lake Drive, Colombo 08 No. 220, Lake Drive, Colombo 08

Designation Director Director

9.3

Profiles of the Board of Directors



Mr. A.R.H. Fernando – Chairman The CEO is also in the capacity of an Executive Director. Mr. Fernando has over 35 years of experience in the tea industry and has been successful in developing, promoting and marketing the traditional beverage of tea in many innovative variants over the last several years. Prior to finding his own Company, he began his career as a trainee Tea Taster at Carson, Cumberbatch & Co., Ltd. He was promoted to a Tea Executive in 1979. He joined Brooke Bond Ceylon Limited as a tea buyer where he was promoted to Tea Manager in 1985. In 1982 he spent one year with Brooke Bond Commodities Ltd. United Kingdom learning international tea blending and trading. He served on the Colombo Tea Traders Association as a member and also as a Director on the Sri Lanka Tea Board. He functioned as the President of the National Chamber of Exporters in 2008 and 2009. He is currently the Vice Chairman of the Tea Exporters Association of Sri Lanka.



Mr. J. Raddalgoda - Executive Director Mr. Raddalgoda accounts for nearly eight years of experience in the plantation management in the private sector and final four years of same holding managerial level posts. His knowledge on the plantation sector includes of tea, rubber, coconut and cardamom. He has been with the Company since February 1998 and handled tasks under managerial positions in the areas of, Production and Commercial operations, Human Resource and Administration. Before joining the Company Mr. Raddalgoda has served as a Plantation Executive at Kelani Valley Plantations Limited.



Mr. H.J. Fernando – Executive Director Mr. Fernando has over 10 years of experience in the tea industry. He joined HVA Lanka Exports (Private) Limited as a Management Trainee and currently acts as the Director Operations being responsible for manufacturing and procurement and is also involved in international brand marketing of the Company.



Mrs. V.S. Amunugama Fernando – Non-Executive Director Mrs. Fernando is a graduate of the Faculty of Law, University of Colombo and an Attorney-at-Law by profession. She counts for over 17 years of experience in the field of advertising and is the founder and joint Managing Director of TRIAD Advertising (Pvt.) Ltd.



Mr. N.C. Vitarana – Non- Executive (Independent) Director Mr. Vitarana is a graduate of the University of Ceylon and a Chartered Accountant. He brings with him a wealth of knowledge and experience acquired over a career spanning over 57 years in areas such as taxation, auditing, banking and financial services, mergers and acquisitions and corporate restructuring both in Sri Lanka and abroad. Mr. Vitarana is a qualified Chartered Accountant has also served as a director of John Keels Holdings PLC.



Mr. J.H.P. Ratnayeke – Non-Executive (Independent) Director Mr. Ratnayeke is a leading commercial lawyer and the senior partner and founder of Paul Ratnayeke Associates. He graduated with honors from the University of Ceylon (Colombo) and has been awarded a LLM Degree by the University of London. He is an Attorney-at-Law of the supreme court of Sri Lanka and a Solicitor of the Supreme Court of England & Wales.

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9.4

Directors’ Interest in Shares

9.4.1

Directors’ Direct and Indirect Shareholdings in the Company The Directors’ direct shareholdings in the Company as at 03rd January 2011 are tabulated below. Table 9-3: Directors’ Shareholdings in HVA Foods Limited as at 30th September 2010 Name of Director

Number of Shares Held

Mr. A.R.H. Fernando 9.4.2

62

Sale or Purchase of Shares by directors There were no sales, transfers or purchases of shares made by the Directors during the two year period immediately preceding the date of this Prospectus.

9.4.3

Directors’ Emoluments Emoluments paid in the form of salaries or bonuses to the Directors during FY 2009/10 amounted to LKR 7,306,800. The Directors are expected to be remunerated in the form of salaries, bonuses during FY 2010/11 to an approximate extent of LKR 12 Million.

9.4.4

Other Directorships Held by the Board Table 9-4: Other Directorships Name of Director

Other Directorships Held

Mr. A.R.H. Fernando

HVA Lanka Exports (Private) Limited HVA Holdings (Private) Limited HVA Farms (Private) Limited HVA Beverages (Private) Limited HVA Fineteas (Private) Limited Lake Drive Holdings (Private) Limited

Mr. J. Raddalgoda

HVA Farms (Private) Limited HVA Beverages (Private) Limited

Mr. H.J. Fernando

Lake Drive Holdings (Private) Limited

Mrs. V.S. Amunugama Fernando HVA Lanka Exports (Private) Limited HVA Holdings (Private) Limited HVA Farms (Private) Limited HVA Beverages (Private) Limited HVA Fineteas (Private) Limited Lake Drive Holdings (Private) Limited TRIAD Advertising (Private) Limited Powerhouse Limited Sarva Integrated (Private) Limited Imageline (Private) Limited Asia Commerce (Private) Limited Printage (Private) Limited Thirty Five KM (Private) Limited

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| HVA Foods Limited – Initial Public Offering

Name of Director

Other Directorships Held Emagewise (Private) Limited Traidhot.com (Private) Limited Traid Mantram (Private) Limited Spaacs (Private) Limited Adpack Productions (Private) Limited Hardtalk (Private) Limited Hammer BTL (Private) Limited Hotel Reef Comber PLC

Mr. N.C. Vitarana

None

Mr. J.H.P. Ratnayeke

Chairman – Arpico Furniture Limited Asia Fort Sri Lanka Direct Investment Fund Limited Asia Growth Fund (Private) Limited Asia Securities (Private) Limited Asian Alliance Insurance PLC Kalyani Mahal (Private) Limited P.R. Intellectual Property Services (Private) Limited P.R. Secretarial Services (Private) Limited Nature Holdings Limited Deputy Chairman – Asia Capital PLC Kegalle Plantations Limited Maskeliya Plantations Limited RPC Construction (Private) Limited RPC Management Services (Private) Limited Raajje Foundation Director – AEN Palm Oil Processing (Private) Limited Arp-Eco (Private) Limited Arpico Exotica Asian (Private) Limited Arpico Flexifoam (Private) Limited Arpico Homes Limited Arpico Interiors (Private) Limited Arpico Plastics Limited Arpidag International (Private) Limited Arpimalls Development Co. (Private) Limited Arpitec (Private) Limited Capital Reach Holding Limited Exotic Horticulture (Private) Limited Hamefa Kegalle (Private) Limited Maskeliya Tea Gardens Ceylon Limited MPL Dendro Thermal Power (Private) Limited Namunukula Plantations Limited Nuwara Eliya Hotels Limited Plastishells Limited

HVA Foods Limited – Initial Public Offering |

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Name of Director

Other Directorships Held Richard Peiris & Company Limited Richard Peiris Distributors Limited Richard Peiris Group Services (Private) Limited Richard Peiris Natural Foams Limited Richard Peiris Plantations (Private) Limited Richard Peiris Rubber Compounds Limited Richard Peiris Rubber Products Limited Richard Peiris Tyre Co., Limited RPC Airlines (Private) Limited RPC Global Travels (Private) Limited RPC Logistics (Private) Limited PC Plantation Management Services (Private) Limited Sierra Cables PLC Sierra Construction (Private) Limited Weligama Bay Properties (Private) Limited Arpitalian Compact Soles (Private) Limited RPC Polymers (Private) Limited RPC Southern Industrial Park (Private) Limited Alternate Director – Allied Export and Import Agencies (Private) Limited Colombo Agencies Limited Jims Farm (Private) Limited

9.4.5

Directors’ Interest in Assets The Directors hold no interest in assets acquired, disposed or leased by the Company during the two years preceding the Offering other than the acquisition of HVA Holdings (Private) Limited. Furthermore, it is not proposed that the Directors will hold any interest in assets to be acquired, disposed or leased by the Company in the two years subsequent to the Offering.

9.4.6

Directors’ Interest in any Material Contracts The Directors hold no interest in contracts with the Company.

9.4.7

Statement – Board of Directors No Director or a person nominated to become a Director of the Company is or was involved in any of the following events:• A petition under any bankruptcy laws filed against such person or any partnership in which he was a partner or any corporation of which he was an executive officer; • Convicted for fraud, misappropriation or breach of trust or any other similar offence which the CSE considers a disqualification.

9.5

Corporate Governance Practices The Directors place a high degree of importance on sound corporate governance practices and are committed to the highest standards of corporate governance within the organization.

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| HVA Foods Limited – Initial Public Offering

The Company understands, supports and has applied the core concepts that underlie enterprise governance and ensures that its standards remain in compliance with the regulatory requirement of the CSE Listing Rules. In line with this, the Company has appointed two Independent Directors to the Board of HVA Foods Limited facilitating independent judgment in Board discussions and decisions. The Board also consists of two NonExecutive Independent Directors, one Non-Executive Director and three Executive Directors including the Chairman. In line with this, Directors and functions of the above committees are detailed below.

9.6

Remuneration Committee The Remuneration Committee consists of two Non-Executive Independent Directors. They are namely Mr. N.C. Vitarana and Mr. J.H.P. Ratnayeke. The committee is responsible for making recommendations to the Board on; • Remuneration framework and levels of the Senior Management • Senior Management performance and equity based remuneration plans including performance incentives and hurdles • Remuneration of Executive Directors Aggregate remuneration paid to Executive and Non-Executive Directors during last year and amount expected to be paid in the current year is given under Section 9.4.3 of this Prospectus.

9.7

Audit Committee The Audit Committee consists of two Non-Executive Independent Directors. They are namely Mr. N.C. Vitarana and Mr. J.H.P. Ratnayeke. The Committee is responsible for the following; •

Evaluating and monitoring the Company’s control environment and risk management function

•

Overseeing and reviewing the quality, cost and scope of internal and external audits

•

Reviewing the reports presented to the Committee by both auditors and management

•

Recommending to the Board the appointment of internal and external auditors

•

Reviewing the Company’s management and statutory reporting

• Reviewing and approving of finance and accounting policies and the ongoing monitoring of their implementation and effectiveness •

Ongoing financial monitoring of the Company’s various disclosure obligations

• The review and pre-approval of any non audit services provided by the internal or external auditors to ensure their independence is maintained at all times

9.8

Senior Management Table 9-5: Senior Management of HVA Foods Limited Name Mr. A.R.H. Fernando Mr. H.J. Fernando Mr. V.I. Gunaratne Mr. S.D. Hewathudella Mr. J. Raddalgoda Mr. J. Kannangara Mr. F.V.L. Samarasinghe

Designation Chairman Executive Director Manager – Marketing Manager – Finance Executive Director Manager – Quality Assurance and Research & Development Specialist Process – Manufacturing & Industrial Engineering

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61



Mr. A.R.H. Fernando – Chairman Refer profile in Section 9.3



Mr. H.J. Fernando – Executive Director Refer profile in Section 9.3



Mr. J. Raddalgoda – Executive Director Refer profile in Section 9.3



Mr. V.I. Gunaratne – Manager, Marketing Mr. Gunaratne began his career as a Marketing Executive at John Keels Group in 1997 & spent 05 years serving the group in subsidiaries in Tea, Leisure & Transport sectors. Subsequently he joined Navigation Maritime Ltd, agents for Hanjin Shipping where he gathered substantial knowledge on ocean freight & its overall operation during the period of 2001 – 2003. Mr. Gunarathne joined HVA Group in 2003 as an Assistant Manager Tea & progressed in his career managing the prestigious Eastern Market where he excelled with remarkable performance. At preset he holds the portfolio of the Marketing Manager of the Group.



Mr. S.D. Hewathudella – Manager, Finance Mr. Hewathudella started his career as a clerk and reached senior management level within a remarkable time frame. He has gained experience in various industries including the hotel sector, hyper & super markets industry (local & overseas) and tea industry. He counts over 25 years of experience in the Finance Management & Accountancy field. For the last 17 years Mr. Hewathudella has been holding senior Managerial positions in several reputed organizations.



Mr. Kannangara – Manager, Quality Assurance and Research & Development Mr. Kannagara holds more than 14 years of experience in Quality Assurance Systems & Research & Development of the FMCG industry. He holds a BSc. Degree in Natural Science and is currently reading for his MBA at the University of Kelaniya.

Mr. F.V.L. Samarasinghe – Specialist Process, Manufacturing & Industrial Engineering Mr. Samarasinghe started his career as a Factory Manager at Unilever, Sri Lanka and at Instant Tea Plant, Agarapathana. He counts for more than 30 years of experience in manufacturing, engineering and industrial engineering. He is also a DNV accredited auditor in HAZARD and Operatability, Health & Safety in industrial processes. Additionally he is a JIPM accredited trainer & auditor in TPM & 5s. He holds an Msc (Eng), B Tech (Eng) Hons., Post Graduate Diploma in Industrial Engineering.

9.8.1

Senior Managements’ Emoluments Emoluments paid to the Chairman and the Senior Management in the form of salaries and bonuses during FY 2009/10 amounted to LKR 10,646,424. The Senior Management is expected to be remunerated in the form of salaries and bonuses during the FY 2010/11 to an approximate extent of LKR 10 Million.

9.9

Statement – Chairman Chairman of the Company has not been involved in any of the following: • A petition under any bankruptcy laws filed against such person or any partnership in which he was a partner or any corporation of which he was an executive officer; • Convicted for fraud, misappropriation or breach of trust or any other similar offence which the CSE considers a disqualification.

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| HVA Foods Limited – Initial Public Offering

9.10

Details of the Management Agreements There are no management agreements presently in force or currently being considered by HVA Foods Limited.

9.11

Human Resources The number of employees of the Company as at 02nd December 2010 was 86, as detailed below. Table 9-6: Human Resources CATEGORY Directors, Executives Clerical, Supervisory, and Minor Staff Manual Grades Total

NUMBER OF STAFF Directors & Executives Clerical Supervisory

25 17 11 33 86

As at 30th September 2010, there were no Trade Unions, Collective Agreements or actions pending against the Company in the Labour Tribunals.

9.12

Information Technology HVA takes every effort to ensure that its information technology systems are current and up to date in line with the Company goals and strategies. The Company’s e-mail servers are based in the US and have 99.9% guaranteed uptime. The Company apart from its servers in Kandana, has an offsite backup storage which demonstrates management’s commitment towards disaster recovery.

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10.0 CAPITAL STRUCTURE As at the date of this Prospectus, the Stated Capital of the Company is Sri Lankan Rupees Fifteen Million and Twenty (LKR 15,000,020) divided into Forty Six Million Five Hundred Thousand and Sixty Two (46,500,062) fully paid Ordinary shares.

10.1

An Overview of the Capital Structure The detailed breakdown of the Stated Capital of HVA Foods Limited is given below. Table 10-1 : Stated Capital of HVA Foods Limited 2010

2009

2008

Stated Capital (LKR) 15,000,020 15,000,020 15,000,020 Number of Ordinary Shares in Issue 46,500,062* 1,500,002 1,500,002 * The Company sub-divided each Ordinary Share into thirty one (31) Ordinary shares on 29th September 2010 • The Company has not issued any new Ordinary Shares during the preceding three financial years. • The Company has no other classes of shares other than the above mentioned Ordinary Shares. • There are no restrictions on the purchase of shares by non-residents in the Company.

10.2

Free Transferability of Shares Upon the Ordinary Shares of the Company being listed on the CSE, such shares shall be freely transferable and the registration of the transfer of such listed shares shall not be subject to any restriction, save and except to the extent required for compliance with statutory requirements.

10.3

Other Securities The Company has not issued any convertible debt securities or any other class of shares other than the shares stated above. Further there are no securities of the same or other class subscribed or sold privately in conjunction with this Offering.

10.4

Takeover Offers There have been no takeover offers by third parties in respect of the Company’s shares during the past two years and no takeover offers have been made by the Company in respect of shares of third parties.

10.5

Share Re-Purchases or Redemptions The Company has not engaged in any share re-purchase, redemption or stated capital reduction exercises in the two years preceding the date of this Prospectus.

10.6

Ten Largest Shareholders as at 03rd January 2011 Table 10-2: Ten Largest Shareholders – Pre IPO after the Split Name

No. of Ordinary Shares

HVA Lanka Exports (Pvt.) Limited Mr. A.R.H. Fernando Total

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| HVA Foods Limited – Initial Public Offering

46,500,000 62 46,500,062

Total 46,500,000 62 46,500,062

%

2008

99.9999 0.0001 100.00

15,000,020 1,500,002

10.7

Major Shareholders of HVA Lanka Exports (Private) Limited from 1990 to date Table 10-3: Major Shareholders of HVA Lanka Exports (Private) Limited Name

No. of Shares

Mountain Hawk (Private) Limited HVA Holdings B.V. Mr. A.R.H. Fernando Mahamadaachchi Lushantha De Silva Merchant Bank of Sri Lanka Paxion Investment Company Ltd. HVA Holdings (Private) Limited Dohothodona Jayantha Gunawardena Mrs. V.S. Amunugama Fernando Vallible Holdings (Pvt.) Ltd. Arrow International (Pvt.) Ltd.

10.8

149,998 99,900 7,602,029 49,988 166,667 83,333 366,572 330,011 01 775,407 3,801,015

Transferred Transferred Transferred Transferred Transferred Transferred Transferred Transferred Transferred

Post IPO Shareholding Structure Table 10-4: Post IPO Shareholding Structure Name HVA Lanka Exports (Pvt.) Limited A.R.H. Fernando Public Total

No. of Ordinary Shares 46,500,000 62 19,928,598 66,428,660

Total 46,500,000 62 19,928,598 66,428,660

% 69.9999 0.0001 30.00 100.00

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10.9

Ratios Year Ended 31st March

Ratio Analysis Profitability Revenue Growth COS/Revenue GP margin Administration exp. growth rate

2010

2009

2010

4% 79% 21% (52%)

21% 81% 19% 8%

(2%) 84% 16% 9%

13% 83% 17% 36%

19% 4% 4% 4079%

18% 11% 13% 145.69%

12% 7% 3% 101%

11% 10% 6% 36%

Liquidity Current Ratio Quick Asset ratio

1.03 0.76

1.04 0.88

1.00 0.85

0.95 0.82

Investor ratios EPS * NAV per share

0.32 0.17

1.17 1.44

0.36 0.52

0.62 2.77

Gearing LT debt/ Equity 3387% Interest Coverage 1.31 Total liability/equity 41.84 * Restated to reflect the new number of shares post-split

425% 2.86 6.08

1151% 2.08 14.92

217% 3.02 3.62

Operating profit Margin Net profit Margin ROA ROE

66

2009

Six Months Ended 30th September

| HVA Foods Limited – Initial Public Offering

11.0 MANAGEMENT DISCUSSION AND ANALYSIS This section discusses the performance of HVA Foods Limited during the last five financial years.

11.1

Operating Results Salient extracts from the Income Statement and the Balance Sheet of HVA Foods Limited and the historical performance of the Company during the five year period ended 31st March 2010 and 6 months ended 30th September 2010 are given below. Table 11-1 : HVA Foods Limited – Summarized Income Statements For the year ended March 31 Revenue Gross Profit Operating Profit Finance Cost PBT Net Profit

2006 2007 2008 299,121,853 253,852,267 386,865,694 44,957,269 51,662,730 54,593,941 9,557,904 17,963,604 14,828,634 1,761,079 23,226,461 31,287,044 11,318,983 (5,262,857) (16,458,410) 9,959,394 (5,273,480) (16,463,446)

All figures in rupees 2009 2010 402,379,235 488,206,319 84,892,616 93,483,325 76,422,054 85,513,225 58,385,691 29,925,028 18,036,363 55,588,197 14,817,965 54,274,768

Table 11-2 : HVA Foods Limited – Summarized Balance Sheets As at March 31 Total Non Current Assets Total Current Assets TOTAL ASSETS

All figures in rupees 2006 2007 2008 2009 2010 64,868,023 161,438,801 160,852,603 158,110,838 236,285,570 113,974,378 230,920,219 177,445,251 177,009,676 281,371,485 178,842,401 392,359,020 338,297,854 335,120,514 517,657,055

Total Capital & Reserves Total Non Current Liabilities Total Current Liabilities TOTAL EQUITY & LIABILITIES

(75,233,184) 9,417,737 (7,045,710) 7,772,255 99,911,117 82,422,970 115,871,638 55,516,826 136,297,102 145,945,728 171,652,615 267,069,645 289,826,737 191,051,157 271,800,210 178,842,401 392,359,020 338,297,854 335,120,514 517,657,055

* Note: A revaluation of reserve was performed in 2007 on freehold land and buildings as at 20th March 2007. Table 11-3: HVA Foods Limited – Summarized Interim Income Statement As at March 31 Revenue Gross Profit Operating Profit Finance Cost PBT Net Profit

Sept. 30, 2010 (figures in rupees) 285,220,778 48,660,907 43,954,499 (14,310,351) 29,644,148 27,067,622

Sept. 30, 2009 (figures in rupees) 252,133,381 40,571,975 31,898,825 (15,331,290) 16,567,535 16,567,535

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Table 11-4: HVA Foods Limited – Summarized Interim Balance Sheet As at March 31

Sept. 30, 2010 (figures in rupees) 290,756,832 313,994,275 604,751,107

Total Non Current Assets Total Current Assets TOTAL ASSETS Total Capital & Reserves Total Non Current Liabilities Total Current Liabilities TOTAL EQUITY & LIABILITIES

Sept. 30, 2009 (figures in rupees) 153,591,941 233,847,081 387,439,022

126,978,742 146,970,330 330,802,035 604,751,107

11.2

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



REVENUE

24,339,790 129,722,324 233,376,908 387,439,022

The movement in revenue of HVA Foods Limited during the last five financial years is depicted below. Chart 11-1: Revenue Movement

500,000

LKR ‘000

400,000 300,000 200,000 100,000 -

2006

2007

2008

2009

2010

As shown above, the Company has recorded a CAGR of 10% over the last five years. It is of importance to note that even in 2009, when the overall tea industry was affected, the Company has been able to maintain a positive growth trend. The increase in revenue is mainly due to the encouraging escalation in prices over the past several years. For example, export prices of HVA Foods Limited has recorded a CAGR of 9% from 20072009. Despite being a predominantly export oriented company and been faced with unexpected natural and financial conditions of overseas countries, the Company has achieved commendable results in terms of turnover numbers.

Gross and Operating Profit The following figures illustrate the gross and operating profits of HVA Foods Limited along with the gross and operating profit margins.

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Chart 11-2: Gross Profit Movement 25%

100,000

20%

80,000

15%

60,000

10%

40,000

5%

20,000

0%

2006

2007

2008

2009

Gross Profit Gross Profit Margin

-

2010

Chart 11-3: Operating Profit Movement 20%

100,000 80,000

15%

60,000 10%

Operating Profit Operating Profit Margin

40,000 5%

20,000

0%

2006

2007

2008

2009

0

2010

Even though the Company’s gross profit and operating profit have increased in terms of absolute values, the margins have decreased due to the slight increase in cost of sales to revenue. The gross margins are comparatively lower when compared to some of its competitors who have achieved about 40% gross margins over the past three years. However, the operating profit margins are closely in line with the industry norms of approximately 13% in recent years compared to a 16% industry margin. Net Profit The movement in net profit of HVA Foods Limited during the last five financial years is depicted below. Chart 11-4: Net Profit Movement

LKR million



80,000

20%

60,000

15%

40,000

10%

20,000

5%

0

0%

(20,000) (40,000)

Net Profit Net Profit Margin

(5%) 2006

2007

2008

2009

2010

(10%)

The net profit of the Company has been severely affected due to the high financing costs. As mentioned above, the Company has continuously been able to maintain healthy operating profits which indicate healthy and stable operations. Moreover, the building of the brand “HELADIV” required substantial amounts of capital in terms of Research & Development, brand registration and surveillance, advertising, etc. that were met by HVA Foods Limited – Initial Public Offering |

69

commercial borrowings which increased finance costs considerably. However, in 2010 there has been a decrease of 49% of finance costs which helped boost the Company’s net profit considerably. Hence, it is expected that post IPO, with the retirement of a substantial amount of debt, the Company will be able to perform at much better margins. Moreover, the turnaround in the bottom line of the Company seen starting from FYE 2009, has a direct correlation to the marketing expenses borne in the earlier years to portray “HELADIV” as a world renowned brand. This further clarifies the importance of the assignment of the brand name via the vesting of HVA Holdings (Private) Limited to HVA Foods Limited.

Recent Performance of HVA Foods Limited The performance of the Company from April - July compared to the same period in the previous year is depicted below. As seen below, the Company has performed substantially better during this year compared to the same period last year. The dip in revenue and profit in July is due to the decrease in sales to the CIS region during the hot summer season. Chart 11-5: Monthly Revenue 60,000,000

LKR

2009 2010

50,000,000

40,000,000

April

May

June

July

Aug.

Sep.

Chart 11-6: Profit Before Taxation

8,000,000 7,000,000 6,000,000

2009

LKR

5,000,000

2010

4,000,000 3,000,000 2,000,000 1,000,000 0 April

70

May

June

| HVA Foods Limited – Initial Public Offering

July

Aug.

Sep.

12.0 STATUTORY AND OTHER GENERAL INFORMATION 12.1

Hosting of Prospectus, Application Form and the Articles of Association on the Web This Prospectus, Application Form and the Articles of Association of the Company will be available on the website of the CSE (www.cse.lk) and on the Company website (www.heladiv.com), from the date of opening of the Issue, until the subscription list closes or up to fourteen (14) Market Days, whichever is earlier.

12.2

Inspection of Documents The Articles of Association, the Auditor’s Report, Audited Financial Statements for the five financial years immediately preceding the date of this prospectus (i.e. FY 2005/06 to FY 2009/10, both periods inclusive), Audited Interim Financial Statements for the period ended up to 30th September 2010 and all other documents to which references are made in this Prospectus could be inspected by the public during normal working hours at the Registered Office of the Company from the date hereof until the subscription list closes or up to fourteen (14) Market Days, whichever is earlier.

12.3

Brokerage Brokerage at the rate of zero decimal five per centum (0.5%) of the Share Offer Price will be paid in respect of the number of shares allotted/allocated on Applications bearing the seal of any bank operating in Sri Lanka or a member/trading member of the CSE.

12.4

Underwriting The Offer is not underwritten and is not conditional upon any minimum subscription being met.

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13.0 TAXATION The following information is an overview of selected taxation and other regulations that may be relevant to the Company and potential investors with regard to share transactions in the Democratic Socialist Republic of Sri Lanka. The discussion does not claim to be a comprehensive explanation of regulations and considerations that pertain to the purchase, ownership and disposition of the Offered Shares. The explanations are based on provisions effective in Sri Lanka at the time of printing of this Prospectus. Investors are advised to consult their own advisors prior to engaging in transactions related to the Offering.

13.1

Corporate Taxation As per the agreement signed with the Board of Investment of Sri Lanka (BOI), HVA Foods Limited would be entitled for the following benefits. • The Company enjoys a concessionary tax rate of 15% for 20 years from 1997. However, according to the 2011 budget proposal, export profits which consist of more than 65% domestic value addition sold with a Sri Lanka brand name registered in Sri Lanka will be reduced to 10%. According to the Inland Revenue Act, the tax rates given below apply for a company incorporated prior to 01st April 2002 with a minimum investment of LKR 50 million or incorporated after 01st April 2002 with a minimum investment of LKR 10 million. • Export of tea packets or packages containing less than one kilo of tea is exempt from income tax from April 01, 2009 till 31st March 2011 in terms of Section 17 of the Inland Revenue Act. • Export of tea bags containing made tea not exceeding four grams is also exempt from income tax under Section 16 of the Inland Revenue Act.

13.2

Withholding Tax (WHT) for Dividends In general, dividends distributed by resident companies out of taxable income to resident or non-resident shareholders are subject to WHT at the rate of 10% under Section 153 of the Inland Revenue Act No. 10 of 2006. The Company is required to deduct dividend tax at source and remit the same to the Department of Inland Revenue. Other than the WHT referred to above, dividends paid on shares to shareholders of the Company will not be subject to any other Sri Lankan tax. Dividend income received by a company resident in Sri Lanka from another company resident in Sri Lanka does not form part of statutory income and is therefore not taxable in the hands of the recipient company.

13.3

Economic Service Charge (ESC) The Company can claim ESC against income tax liability. Unclaimed ESC can be carried forward only for five (05) years. The Company is liable to pay ESC at the rate of 0.25% on its turnover, under the Schedule to the Economic Service Charge Act No. 13 of 2006, as amended.

13.4

Taxation of Share Transactions A transaction tax at the rate of 0.2% on the sales and purchase of all share transactions is being charged from both the buyer and the seller since January 1, 2005. This tax is part of the transaction cost charged when trading shares on the CSE.

13.5

Stamp Duty The Company is liable to pay stamp duty at the rate of 0.5% for the Offering and on any new shares that may be issued in the future in line with current stamp duty regulations.

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14.0 STATUTORY DECLARATIONS Statutory Declaration by the Directors 03rd January 2011 We, the undersigned being the Directors of HVA Foods Limited hereby declare and confirm that we have read the provisions of the Companies Act No.7 of 2007 relating to the issue of the Prospectus and that those provisions have been complied with. This Prospectus has been seen and approved by us and we collectively and individually accept full responsibility for the accuracy of the information given and confirm that the provisions of the CSE Listing Rules of the Colombo Stock Exchange and the Companies Act. No. 7 of 2007 and any amendments to it from time to time have been complied with and after making all reasonable enquiries and to the best of our knowledge and belief, there are no other facts the omission of which would make any statement herein misleading or inaccurate. Where representations regarding the future performance of the Company have been given in the Prospectus, such representations have been made after due and careful enquiry of the information available to the Company and making assumptions that are considered to be reasonable at the present point in time and according to our best judgement. Name Mr. A.R.H. Fernando Mr. H.J. Fernando Mr. J. Raddalgoda Mrs. V.S. Amunugama Fernando Mr. N.C. Vitarana Mr. J.H.P. Ratnayeke

Designation

Signature

Chairman Executive Director Executive Director Non-Executive Director Non-Executive (Independent) Director Non-Executive (Independent) Director

Sgd. Sgd. Sgd. Sgd. Sgd. Sgd.

Statutory Declaration by the Managers to the Issue 03rd January 2011 We, Acuity Partners (Private) Limited, of 53, Dharmapala Mawatha, Colombo 3 being the Managers to this Public Share Issue of HVA Foods Limited hereby declare that to the best of our knowledge and belief the Prospectus constitutes full and true disclosure of all material facts about the Issue and HVA Foods Limited whose Ordinary Voting Shares are being issued.

Sgd.

Sgd.

Director

Director

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Statutory Declaration by the Company 03rd January 2011 An application has been made to the Colombo Stock Exchange for permission to deal in and for a listing for all of the Ordinary Voting Shares issued by the Company and those Ordinary Voting Shares which are the subject of this issue. Such permission will be granted when the ordinary shares are listed on the Colombo Stock Exchange. The Colombo Stock Exchange assumes no responsibility for the correctness of any of the statements made or opinions expressed or reports included in this Prospectus. Listing on the Colombo Stock Exchange is not to be taken as an indication of the merits of the Company or of the securities issued.

74

Sgd.

Sgd.

Director

Director

| HVA Foods Limited – Initial Public Offering

ACCOUNTANT’S REPORT AND FIVE YEAR SUMMARY

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19th November 2010 The Board of Directors HVA Foods Ltd 39 A, Linton Road Nagoda Kandana Dear Sirs,

ACCOUNTANTS’ REPORT FOR INCLUSION IN THE PROSPECTUS OF HVA FOODS LIMITED (FORMERLY KNOWN AS HVA FOODS(PVT) LIMITED)

Introduction This report has been prepared for inclusion in the Prospectus in connection with the initial public offering of 19,928,598 Ordinary Shares each at Rs.16/- based on the audited financial statements and the Interim Review for the six months ended 30th September 2010.

1. Incorporation The company was incorporated as a private company on 22nd August 1997 under the provisions of Companies Act No. 17 of 1982 and re-registered under Companies Act No. 07 of 2007. The Registered Office of the company is located at No. 39 A, Linton Road, Kandana. The principal activity of the company is manufacturing and exporting of value added tea. The company was given approval on its application to the Registrar of Companies to the change its status to a public limited liability company on 27th October 2010 under section 11(1) of the Companies Act No. 07 of 2007. In accordance with the certificate dated 03rd November 2010 issued by the Registrar of Companies, HVA Foods (Pvt) Limited changed its name to HVA Foods Limited The company acquired 99.99% shares of HVA Holding (Pvt) Ltd on 29th September 2010. This is a private limited liability entity.

2. Financial Statements of the company and its subsidiary 2.1 Five Years Summary of Financial Statements A summary of the Income Statements, Balance Sheets and Cash Flow Statements for the financial years ended 31st March 2006 to 31st March 2010, based on the audited financial statements of the company are set out on pages 79 and 80 of the Prospectus. We have not been provided the audited financial statements of HVA Holding (Pvt) Ltd prepared in accordance with Sri Lanka Auditing Standards for the years ended 31st March 2006 to 31st March 2009. As result we have not disclosed the summary of financial position and performance of the subsidiary except for the year ended 31st March 2010 as required in the fourth schedule, section 20(3) in the companies Act No 07 of 2007.

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| HVA Foods Limited – Initial Public Offering

2.2 Audited Financial Statements for the year ended 31st March 2010 The Balance Sheet as at 31st March 2010 and related Statement of Income, for the year then ended are set out on pages 85 to 106 of the Prospectus. We have audited these financial statements and our report dated 30th September 2010 is attached to the Financial Statements.

2.3 Interim review of the Financial Statements for the six months ended 30th September 2010 The consolidated balance sheet as at 30th September 2010 and related statement of Income for the financial period then ended are set out on pages 108 to 127 of the prospectus. We have done a review according to the Sri Lanka Standard on Review Engagements-2400 on these financial statements and our report dated 19th November, 2010 is attached to the Prospectus. Following are the major events that took place during the period of 01th April 2010 to 30th September 2010. - The company acquired HVA Holding (Pvt) Ltd on 29th September 2010 for a consideration of Rs.45Mn. The consideration was accounted as payable to HVA Lake Drive (Pvt) Ltd since it was the parent company of HVA Holding (Pvt) Ltd. As set out in the objectives of the prospectus, consideration will be settled by using the proceeds received from the initial public offering. - The group has recognized the brand “HELADIV” as an intangible asset in the interim financial statements as derived from the business combination. Refer note 12 to the interim review financial statements for the details of the brand. - The company has sub divided an ordinary share into 31 ordinary shares, thereby increasing the number of the ordinary shares to 46,500,062 shares. The special resolution was passed on 29th September 2010. - The company acquired a land for Rs. 6,000,000 from Lake Drive Holding (Pvt) Limited, a related company. Details are disclosed in Note 10.5 of the Interim Financial Statements.

2.4 Audit Reports We have audited the financial statements of the Company for the periods ended 31st March 2006 to 31st March 2010. Qualified opinions have been issued for the financial years 2005/06 and 2006/07 and reports with emphasis of matter have been issued for the financial years 2007/08 and 2008/09 as described below. An unqualified audit opinion has been issued for the financial year ended 31st March 2010. Year 2005/06

2006/07

Year 2007/08

2008/09

Qualifications made in the Audit Report Qualifications reported were; a) The corresponding figures for the year ended 31st March 2005 were subject to a disclaimer of opinion due to a limitation of scope in obtaining sufficient appropriate audit evidence for the audit. b) The Company has accumulated losses amounting to Rs.96,445,654/- and its current liabilities exceeded current assets by Rs.57,678,237/- and total liabilities exceeded total assets by Rs.75,223,184/- as at 31st March 2006. However, as disclosed in the financial statements the holding company has planned to infuse Rs.80m equity. Qualification reported was; The Company has accumulated losses amounting to Rs.101,719,137/- and its current liabilities exceeded current assets by Rs.36,149,426/- and has a negative cash flow of Rs.52,398,245/- during the year. Further there is a receivable of Rs.62,539,888/- from holding company which has a negative Balance Sheet. These factors raise substantial doubt that the company will be able to continue as a going concern. However, capital infusion for operations of the Holding Company after the year end may enable the company to overcome short term cash flow requirements Emphasis of Matter highlighted in the Audit Report The Company incurred a loss of Rs.16,463,446 during the year ended March 31st 2008 and, as of that date, the accumulated losses were Rs.118,182,584/- current liabilities exceeded current assets by Rs.112,381,486 /-and total liabilities exceeded total assets by Rs.7,045,710/-. These factors raise substantial doubt that the company will be able to continue as a going concern. The accumulated losses of the Company were Rs.103,364,619/- and the current liabilities exceeded current assets by Rs.14,041,481/-. These factors raise substantial doubt that the company will be able to continue as a going concern.

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HVA Holding (Pvt) Ltd was audited by another auditor who has expressed a qualified opinion due to the substantial doubt in the company’s ability to continue as a going concern. Further, the audit report did not comply with the requirements of SLAuS 700: The Auditor’s Report on Financial Statements.

2.5 Accounting Policies The Financial Statements of the Company for the periods ended 31st March 2006 to 31st March 2010 comply with Sri Lanka Accounting Standards. The accounting policies of the Company are stated in detail in the audited financial statements of HVA Foods (Pvt) Limited for the year ended 31st March 2010.Changes in the accounting policies of the Company since 31st March 2006 to 31st March 2010 are given below. Year 2005/06 2006/07

2007/08 2008/09

2009/10

Changes in Accounting Polices There were no material changes. Except for the following there were no material accounting policy changes to the financial statements. • The Company has adopted the following revised Sri Lanka Accounting Standards during the year. a) SLAS – 03 (revised) Presentation of Financial Statements b) SLAS – 12 (revised) Events after the Balance Sheet Date c) SLAS – 14 (revised) Income Tax d) SLAS – 18 (revised) Property, Plant & Equipments e) SLAS – 19 (revised) Leases f) SLAS – 21 (revised) The Effect of Changes in Foreign Exchange Rates g) SLAS – 30 (revised) Related Party Disclosures • The cost of the inventories based on weighted average cost principle instead of FIFO principle, used in year 2005/06. There were no material changes. Except for the following there were no material accounting policy changes to the financial statements. • The Company has made changes to be in compliance with Sri Lanka Accounting Standard No.16 – Employee Benefits (Revised 2006). As a result, the gratuity liability was valued using the Gratuity Formula method. There were no material changes.

2.6 Dividends The Company has not declared dividends for the periods ended 31st March 2006 to 31st March 2010.

2.7 Events after the Balance Sheet Date There were no significant events that occurred after the last Balance Sheet date of 31/03/2010 except for the IPO of the shares and a share split approved by the Board of Directors on 29th September 2010.

Yours faithfully,

Chartered Accountants Colombo SR/CP

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| HVA Foods Limited – Initial Public Offering

HVA Foods (Pvt) Ltd Five Years Summary - Income Statement Revenue Gross Profit Net Profit before finance cost Profit/(loss) before tax Taxation Profits attributable to Shareholders

2009/10 Rs. 488,206,319 93,483,325 78,274,664 55,588,197 (1,313,429) 54,274,768

2008/09 Rs.

2007/08 Rs.

402,379,235 386,865,694 84,892,616 54,593,941 70,493,436 14,828,634 18,036,363 (16,458,410) (3,218,398) (5,036) 14,817,965 (16,463,446)

2006/07 Rs.

2005/06 Rs.

253,852,267 299,121,853 51,662,730 44,957,269 17,963,603 9,557,904 (5,262,858) 11,318,983 (10,623) (1,359,589) (5,273,481) 9,959,394

HVA Foods (Pvt) Ltd Five Years Summary - Balance Sheet

2009/10 Rs.

2008/09 Rs.

2007/08 Rs.

2006/07 Rs.

2005/06 Rs.

Non-current assets Current assets

236,285,570 281,371,485

158,110,838 160,852,603 174,815,198 177,445,251

161,438,801 64,868,023 230,920,219 113,974,378

Total Assets

517,657,055

332,926,036 338,297,854

392,359,020 178,842,401

Capital & reserve Stated Capital 15,000,020 15,000,020 15,000,020 15,000,020 15,000,020 Revaluation Reserve 134,000,948 96,136,854 96,136,854 96,136,854 6,212,450 Retained Earnings/(losses) (49,089,851) (103,364,619) (118,182,584) (101,719,137) (96,445,654)

99,911,117

7,772,255

(7,045,710)

9,417,737 (75,233,184)

Non-current liabilities Current liabilities

145,945,728 271,800,210

136,297,102 55,516,826 188,856,679 289,826,738

115,871,638 82,422,970 267,069,645 171,652,615

Total Equity & Liabilities

517,657,055

332,926,036 338,297,854

392,359,020 178,842,401

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HVA Foods (Pvt) Ltd Five Year Summary - Cash Flow Statement

2009/10 Rs.

2008/09 Rs.

2007/08 Rs.

2006/07 Rs.

2005/06 Rs.

55,588,197

18,036,363

(16,458,410)

(5,262,858)

11,318,983

95,888,094

54,147,710

23,488,867

22,072,783

22,688,217

(8,123,833)

11,472,892

78,065,640

(187,679,128)

7,604,765

(51,451,541)

(7,510,380)

(8,248,593)

(11,940,528)

(7,958,710)

49,927,284

44,605,559

33,453,217

148,093,448

(243,214)

Net change in cash and cash equivalents

(9,648,090)

48,568,071

36,363,830

(51,526,208)

(597,159)

Cash and cash equivalents at 01st April

32,533,653

(16,034,418) (52,398,248)

(872,040)

(274,881)

Cash and cash equivalents at 31st March

22,885,563

32,533,653 (16,034,418)

(52,398,248)

(872,040)

Profit before taxation Operating profit before working capital changes Net cash from/ (used in) operating activities Net cash used in investing activities Net cash flows from financing activities

HVA Holdings (Pvt) Ltd Summary of Balance Sheet as at 31st March 2010

2009/10 Rs.

Cash & cash equivalent Total assets

71,705 71,705

Capital & reserves Stated capital Retained earnings

183,700 (117,695)

Other payables Current liabilities

66,005 5,000 5,000

Total equity & liabilities

71,005

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| HVA Foods Limited – Initial Public Offering

HVA Foods (Pvt) Ltd Five Year Summary - Financial Ratios & Statement of Changes in Equity

2009/10

2008/09

2007/08

2006/07

Financial Ratio Earnings/(Loss) Per Share 1.17 0.32 (0.35) (0.11) (Adjusted) (Adjusted) (Adjusted) (Adjusted) Net Assets Per Share 2.15 0.17 (4.70) 6.28 Current Ratio (Times) 1.04 0.92 0.061 0.86 Statement of Changes in Equity

Stated Revaluation Capital Reserves

2005/06 0.21 (Adjusted) (50.16) 0.67

Retained Earnings

Total

Balance as at 1st April 2005 Profit/(Loss) for the year

15,000,020 -

6,212,450 (106,405,049) (85,192,579) - 9,959,393 9,959,393

Balance as at 1st April 2006 Surplus/(reversals) on revaluation of property Profit/(Loss) for the year

15,000,020 6,212,450 - 89,924,404 - -

Balance as at 31st March 2007 Profit/(Loss) for the year

15,000,020 96,136,854 (101,719,137) 9,417,737 - - (16,463,446) (16,463,446)

Balance as at 31st March 2008 Profit/(Loss) for the year

15,000,020 96,136,854 (118,182,583) - - 14,817,965

Balance as at 31st March 2009 Surplus/(reversals) on revaluation of property Profit/(Loss) for the year

15,000,020 96,136,854 (103,364,618) 7,772,256 - 37,864,094 - 37,864,094 - - 54,274,768 54,274,768

Balance as at 31st March 2010

15,000,020 134,000,948

(96,445,656) (75,233,186) - 89,924,404 (5,273,481) (5,273,481)

(49,089,850)

(7,045,709) 14,817,965

99,911,118

The shares of the Company has sub divided into 31 Ordinary shares on 27th September 2010. Therefore, after the sub division of shares, the total no. of shares at 46,500,062. The ratios were adjusted accordingly. However, these adjustments were not incorporated in Audited Financial Statements - 31.03.2010. These amendments were incorporated in Interim Financial Statements - 30.09.2010 and we will be incorporated these disclosures in the Future Financial Statements.

Finance Manager The above summarised financial information and its extraction from audited financial statements, is the responsibility of the Board of Directors.

Director

Director HVA Foods Limited – Initial Public Offering |

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FINANCIAL STATEMENTS FOR THE YEAR ENDED 31st MARCH 2010 Please note that under Notes to the Financial Statements of 31st March 2010, to be amended in the Future Financial Statements. Free hold land was revalued during the financial year ended 31st March 1998 by Mr. S.D.P. Senadhira, Chartered Valuer. The surplus on valuation amounted to Rs. 6,212,450/-. Further, free hold land has been valued during the year ended 31st March 2007, by Mr. P.B. Kalugalagedara, Chartered Valuer. The Resulting surpluses was Rs. 69,874,033/- . The free hold land have been again revalued by Mr. P.B. Kalugalagedara, Chartered Valuer in March 2010. The resulting revaluation surplus reported amounted to Rs. 22,800,000/-. Buildings were revalued during the financial year ended 31st March 2007, by Mr. P.B. Kalugalagedara, Chartered Valuer. The resulting surpluses was Rs. 20,050,371/- . The building has been again revalued by Mr. P.B. Kalugalagedara, Chartered Valuer in March 2010. The resulting revaluation surplus reported amounted to Rs. 6,675,857/-. The carrying amount of revalued assets that would have been included in the financial statements had the assets been carried at cost less depreciation is as follows;

Cost 31.03.2010

Freehold Land Buildings

82

15,213,487 36,314,222

| HVA Foods Limited – Initial Public Offering

Cumulative Depreciation If assets were carried at cost 31.03.2010 18,424,315

Net Carrying Amount 31.03.2010

15,213,487 17,889,907

Net Carrying Amount 31.03.2009

15,213,487 17,845,509

AUDITORS’ REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST MARCH 2010

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INCOME STATEMENT All amounts in Sri Lanka Rupees

For the year ended 31st March 2010 Note

2009

Revenue 4 Cost of sales

488,206,319 (394,722,994)

402,379,235 (317,486,619)

Gross profit Other operating income 5 Distribution expenses Administration expenses

93,483,325 28,832,656 (8,367,587) (35,673,730)

84,892,616 24,957,801 (8,989,701) (30,367,280)

Results from operating activities

6

78,274,664

70,493,436

Finance income Finance costs

7,238,561 (29,925,028)

5,928,618 (58,385,691)

Net finance costs

7

(22,686,467)

(52,457,073)

Profit before income tax Income tax expense 8

55,588,197 (1,313,429)

18,036,363 (3,218,398)

Profit for the year

54,274,768

14,817,965

36.18

9.88

Basic earnings per share

9

The Accounting Policies and Notes form an integral part of these Financial Statements.

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| HVA Foods Limited – Initial Public Offering

BALANCE SHEET All amounts in Sri Lanka Rupees

As at 31st March 2010 Note

2009

ASSETS Property, plant & equipment 10 236,285,570 Total non-current assets 236,285,570 Inventories 11 47,240,322 Trade receivable 12 108,200,440 Amount due from related parties 13.a 77,516,294 Pre-payments & other receivables 14 11,001,174 Income tax receivable 3,702,935 Deposits & advances 15 2,174,077 Cash & cash equivalents 16.a & b 31,536,243 Total current assets 281,371,485 Total assets 517,657,055

158,110,838 158,110,838 46,057,609 75,718,573 2,999,663 11,895,503 2,194,478 1,106,921 37,036,929 177,009,676 335,120,514

Equity Stated capital 17 15,000,020 Revaluation reserve 18 134,000,948 Retained earnings 19 (49,089,851) Total equity 99,911,117

15,000,020 96,136,854 (103,364,619) 7,772,255

Liabilities Employee benefits 20 7,164,612 Interest-bearing loans and borrowings 21.a 108,316,882 Ice tea project - grant 26 29,402,272 Deferred tax liabilities 25 1,061,962 Total non-current liabilities 145,945,728

5,910,529 128,678,149 1,708,424 136,297,102

Trade payable 22 Amount due to related parties 13.b Interest-bearing loans and borrowings 21.b Deposits & advances payable 23 Accrued expenses & other creditors 24 Bank overdraft 16.c Total current liabilities Total liabilities Total equity & liabilities

21,035,495 1,043,267 134,534,841 17,974,979 11,959,299 4,503,276 191,051,157 327,348,259 335,120,514

33,205,072 16,190,719 175,421,120 21,684,380 16,648,239 8,650,680 271,800,210 417,745,938 517,657,055

The Accounting Policies and Notes form an integral part of these Financial Statements.. These financial statements are prepared in compliance with the requirements of the Companies Act No. 07 of 2007. Chief Financial Officer The board of directors is responsible for the preparation and presentation of these financial statements. For and behalf of the board. Director

Director

30th September 2010 Colombo HVA Foods Limited – Initial Public Offering |

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STATEMENT OF CHANGES IN EQUITY All amounts in Sri Lanka Rupees

For the year ended 31st March Balance as at 1st April 2008 Profit for the year Balance as at 31st March 2009

Stated Revaluation capital Reserves 15,000,020 - 15,000,020

Surplus/(reversals) on revaluation of property

-

Profit for the year

-

Balance as at 31st March 2010

15,000,020

Retained Earnings

Total

(118,182,584)

(7,045,710)

14,817,965

14,817,965

(103,364,619)

7,772,255

96,136,854 - 96,136,854 37,864,094 - 134,000,948

The Accounting Policies and Notes form an integral part of these Financial Statements..

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| HVA Foods Limited – Initial Public Offering

-

37,864,094

54,274,768

54,274,768

(49,089,851)

99,911,117

CASH FLOW STATEMENT All amounts in Sri Lanka Rupees

2010

2009

Cash flow from operating activities Profit before taxation 55,588,197

18,036,363

Adjustments for: Depreciation 11,140,902 Provision for gratuity 1,438,631 Provision for slow moving inventories 1,474,473 Provision for bad debts 288,199 Interest expenses 25,957,692 Profit/(loss) on disposal of property, plant and equipment - 95,888,094

10,224,268 3,445,492 421,787 19,754 21,972,168 27,878 54,147,710

Change in inventories Change in trade receivables Change in prepayments & other receivables Change in amount due from related party Change in deposits & advances receivables Change in trade payables Change in amount due to related party Change in deposits & advances payables Change in accrued expenses & other creditors

(2,657,186) (32,770,067) 892,510 (74,516,631) (1,289,223) 12,169,577 15,147,452 3,709,401 4,688,940 21,262,868

518,136 4,952,349 12,417,503 (2,328,992) 975,792 (149,599) (32,809,503) (1,572,501) 1,356,345 37,507,240

Interest paid Gratuity paid Tax paid Net cash from/ (used in) operating activities

(25,735,624) (184,548) (3,466,529) (8,123,832)

(21,985,986) (326,464) (3,721,898) 11,472,892

For the year ended 31st March

Cash flows from investing activities Acquisition of property, plant and equipment (51,451,541) Proceeds from sale of property, plant and equipment - Net cash used in investing activities (51,451,541)

(7,578,380) 68,000 (7,510,380)

Cash flows from financing activities Ice tea project-grant 29,402,272 Change in finance lease liabilities (3,655,021) Change in bank borrowings 24,180,033 Net cash flows from financing activities 49,927,283

(2,911,471) 47,517,030 44,605,559

Net increase in cash and cash equivalents Cash and cash equivalents at 01st April Cash and cash equivalents at 31st March (Note A)

(9,648,089) 32,533,653 22,885,563

48,568,071 (16,034,418) 32,533,653

Note A -Cash and cash equivalents Cash in hand and cash at banks 31,536,243 Bank overdrafts (8,650,680) Cash and cash equivalents at end of the year 22,885,563

37,036,929 (4,503,276) 32,533,653

The Accounting Policies and Notes form an integral part of these Financial Statements.

HVA Foods Limited – Initial Public Offering |

89

NOTES TO THE FINANCIAL STATEMENTS 1.

Reporting entity

estimates.

HVA Foods (Private) Limited ( the “Company”) is a company domiciled in Sri Lanka. HVA Foods (Pvt) Ltd is a wholly owned subsidiary of HVA Lanka Exports (Pvt) Ltd., the Company was incorporated on 22nd August 1997. The Registered Office of the company is located at No. 39 A, Linton Road, Kandana. The principal activity of the company is manufacturing and exporting of value added tea.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.

2.

Basis of preparation

(a)

Statement of compliance

3.

The financial statements of HVA Foods (Pvt) Ltd have been prepared in accordance with Sri Lanka Accounting Standards (SLAS) laid down by the (a) Institute of Chartered Accountants of Sri Lanka and the requirements of the Companies Act No. 07 of (i) 2007. The financial statements were authorized for issue by the Board of Directors on 30th September 2010.

(b) Basis of measurement The financial statements have been prepared on the historical cost basis. No adjustments have been made for inflationary factors in the financial statements.

Significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in these financial statements, and have been applied consistently by the company.

Foreign currency Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currency at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the foreign exchange rate at that date. Foreign exchange differences arising on translation are recognized in profit or loss.

(b) Change in accounting policies (c)

Functional and presentation currency These financial statements are presented in the Sri Lanka rupees, which is the company’s functional currency. All financial information presented in Sri (c) Lanka rupees has been rounded to the nearest (i) rupee.

(d) Use of estimates and judgments The preparation of financial statements in conformity with SLASs requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these

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| HVA Foods Limited – Initial Public Offering

The accounting policies adopted are consistent with those used in the previous financial year.

Property, plant and equipment Recognition & measurement Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the assets to a working condition for its intended use, and the costs of dismantling and removing the items and restoring the site on which they are located. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment.

Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and are recognized net within “other income” in profit or loss. When re-valued assets are sold, the amounts included in the revaluation surplus reserve are transferred to retained earnings.

(ii)

initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Other leases are operating leases and, are not recognized on the company’s Balance sheet.

Subsequent costs The Company recognizes in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred if it is probable that the future economic benefits embodied with the item will flow to the company and the cost of the item can be measured reliably. All other costs are recognized in the income statement as an expenses as incurred.

(d) Inventories Inventories are stated at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated cost necessary to make the sale. The cost of inventories is based on the Weighted – Average Cost principle and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of overheads based on normal operating capacity.

(iii) Deprecation Depreciation of property, plant & equipment of the company is provided for on a consistent basis, over the period appropriate to the estimated useful lives of the assets. Generally assets are written off on a straight-line method over the following periods. Building 20 years Motor Vehicles 04 years Stores Equipments 04 years Furniture & Fittings 10 years Plant & Machinery 04 years Computers 04 years Software Packages 04 years Tea room equipments 04 years Depreciation for all property, plant and equipment are provided proportionately in the month of purchase and in the month of disposal of the assets.



Revaluation Revaluation has been performed on freehold land and buildings by professionally qualified valuer using the market value method in the year ended 31/03/2010. The surplus is recognized on the net carrying value of the asset and is transferred to a revaluation reserve after restating the asset at the revalued amount. The company revalues land and buildings at least once in five years which is stated at its fair value at the date of revaluation less any subsequent impairment loss.

(iv) Leased assets Leases in terms of which the company assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon

(e)

Trade and other receivable Trade receivables are stated at the amounts they are estimated to be realized net of provisions for bad and doubtful receivables. Other receivables and dues from related parties are recognized at cost less provision for bad and doubtful receivables.

(f)

Impairment The carrying amounts of the company’s nonfinancial assets, other than inventories and deferred tax asset are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. The recoverable amount of an asset or cashgenerating until is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from counting use that are largely independent of the cash inflows of other assets HVA Foods Limited – Initial Public Offering |

91

NOTES TO THE FINANCIAL STATEMENTS or groups of assets (the “cash-generating unit”) An impairment loss is recognized if the carrying amount of an asset or its cash-generating unit exceeds its estimated recoverable amount. Impairment losses are recognized in profit or loss. Impairment losses recognized in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other in the unit (group of units) on a pro rate basis.

the periods in which the expense is incurred. Grants that compensate the company for the cost of an asset are recognized in the income statement as revenue on a systematic basis over the useful life of the asset.

(i) Revenue (i) Goods sold Revenue from the sale of goods is recognized in the income statement when the significant risks and rewards of ownership have been transferred to the buyer. No revenue is recognized if there are significant uncertainties regarding recovery of the consideration due, associated costs or the possible return of goods also continuing management involvement with the goods.

(g) Employee benefits (i) Defined contribution plans The Company contributes 12% and 3% of salary to the Employees Provident Fund and Employees Trust Fund respectively, in terms of EPF Act No15 of 1958 as amended and to Employers Trust Fund in terms of the ETF Act No.46 of 1980 as amended.

(ii)

Defined benefit plans Provision has been made for retirement gratuities from the first year of service for all employees in conformity with the SLAS 16. However under the Payment of Gratuity Act No. 12 of 1983, the liability to an employee arises only on completion of 5 years of continued services.

(ii)

Interest income recognized as it accrues in profit or loss.

(iii) Dividend income Dividend income is recognized in the income statement on the date that the entity`s right to receive payments is established.

(j)

(h) Provisions

(i)

Government grants A Government grant is recognized in the balance sheet initially as deferred income when there is a reasonable assurance that it will be received and the conditions attached to it are complied with. Grants that compensate the company for expenses incurred are recognized as revenue in the income statement on a systematic basis in

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| HVA Foods Limited – Initial Public Offering

Cash and cash equivalents Cash and cash equivalents are defined as cash in hand, demand deposits and short-term highly liquid investments, readily convertible to know amounts of cash and subject to insignificant risk of changes in valve. For the purpose of cash flow statement, cash and cash equivalents consist of cash in hand and deposits in banks net of outstanding bank overdrafts. Investments with short maturities i.e. three months or less from the date of acquiescing are also treated as cash equivalents.

The liability is not externally funded, nor actually valued. The Gratuity Liability is valued using Gratuity Formula method as required by the revised Sri Lanka Accounting Standard No.16 Employee Benefits.

A provision is recognized when the company has a present obligation (legal or constructive) as a result of a past event, where it is probable that an outflow of recourses embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the quantum of the outflow.

Interest Income

(k) (i)

Taxation Income Tax The provision for income tax is based on the elements of income & expenditure as reported in the financial statements and computed in accordance with the provisions of the Inland Revenue Act No.10 of 2006 and amendments there to. The company enjoys a concessionary tax rate for 20 years from 1997 due to a BOI agreement.

(ii) Deferred tax Deferred tax is recognized using the balance

sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit, and differences measured at the rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the balance sheet date. A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilized. Deferred tax assets are reviewed at each balance sheet date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

(ii)

Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.

(iii) Finance income & expenses Finance income comprises interest income on funds invested. Interest income is recognized as it accrues in profit or loss. Finance expenses comprise interest expenses on borrowings, bank charges and debit tax. All borrowing costs are recognized in profit or loss. Foreign currency gains and losses are reported on a net basis.

(n) Earnings/(loss) per share The group presents basic earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the company by the weighted average number of ordinary shares outstanding during the period.

(iii) Economic service charge As per the provisions of the Economic Service Charge Act No 13 of 2006, Economic Service (ESC) is payable on the liable turnover at specific rates. ESC is deductible from the income tax liability. Any unclaimed liability can be carried forward and set off against the income tax payable as per the relevant provisions in the Act.

(o) Comparative information Wherever necessary comparative figures are reclassified to confirm to the changes in presentation in the current year and disclosed as notes to the financial statements.

(iv) Social responsibility Levy As per the provisions of the Finance Act No 5 of 2005, as amended by the Finance Act No 11 of 2006, Social Responsibility Levy (SRL) was introduced with effect from 01st January 2005. SRL is payable at the rate of 1.5% on all taxes and levies chargeable.

(l)

(p) Cash flow statement The cash flow of the company has been presented in using “indirect method” in accordance with SLAS-09 (cash flow statement)

Trade and other payables Trade and other payables are stated at their cost.

(q) Events occurring after the balance sheet date All material post balance sheet events have been considered and where appropriate adjustments or disclosures have been made in respective notes to the financial statements.

(m) Expenses (i) Expenses recognition Expenses are recognized in the income statement on the basis of a direct association between the cost incurred and earning of specific item of income. All expenditure incurred in the running of the business and in maintaining the property, plant & equipment in state of efficiency has been charged to revenue in arriving at the profit for the year.

Finance lease payments

(r)

Contingent liabilities Contingencies are possible assets or obligations that arise from a past event and would be confirmed only on the occurrence or nonoccurrence of uncertain future events, which are beyond the company’s control.

HVA Foods Limited – Initial Public Offering |

93

NOTES TO THE FINANCIAL STATEMENTS (Contd.) All amounts in Sri Lanka Rupees



2010

2009

4 Revenue Export sales 461,489,725 Local sales 26,716,594 488,206,319

380,307,385 22,071,850 402,379,235

5 Other operating income Sale of bin tea & dust 802,283 Brand promotion incentive 297,937 Packing income 27,428,218 Gain on sale of property plant & equip. - Other income 304,218 Insurance claim - Receivable/(payable) written off/(back) - 28,832,656

1,294,505 21,754,558 (27,878) 805,444 (4,821) 1,135,993 24,957,801

6

290,000 421,787 211,714 1,309,287 15,970,155 1,114,036 284,629 394,500

Result from operating activities The result from operating activities is after charging all expenses including following, Auditors’ remuneration 300,000 Receivable/(payable) written off/(back) 3,759,784 Provision for slow moving inventories 1,474,473 Legal expenses 382,558 Provision for gratuity 1,438,631 Salaries & wages 11,943,503 EPF 1,392,706 ETF 348,227 Bonus & incentive 620,486

7 Finance income and expense Finance income Interest income 2,373,047 Interest from debtors 2,931,126 Foreign exchange gain 1,934,388 7,238,561 Finance costs Loan interest - packing credit (4,344,913) Loan interest - term loan (8,979,346) Interest - Lake drive holdings (Pvt) Ltd. (194,255) Interest on lease rentals (875,736) Interest on bill discounts (8,703,599) Over due interest (1,057,032) Bank overdraft interest (1,802,810) Bill discount charges (1,361,892) Factoring charges (260,251) Bank charges (2,345,194) Foreign Exchange loss - (29,925,028) Net finance costs (22,686,467)

94

| HVA Foods Limited – Initial Public Offering

4,080,066 1,848,552 5,928,618 (3,219,842) (6,395,414) (109,655) (1,626,001) (5,884,475) (1,907,548) (2,829,233) (1,192,094) (85,239) (2,601,340) (32,534,850) (58,385,691) (52,457,073)

NOTES TO THE FINANCIAL STATEMENTS (Contd.) All amounts in Sri Lanka Rupees



2010

8 Income tax expense 8.a Current income tax Current tax charges 2,090,391 (Over) / under provision of previous year (130,500) 1,959,891 Deferred tax Deferred tax charge / (reversal) (Note-25) (646,462) Income tax for the year 1,313,429 8.b Reconciliation of accounting profit to tax expenses Business profit / (loss) before tax 55,588,197 Exempt Income (56,521,908) Aggregate disallowable expenses 24,590,992 Aggregate allowable expenses (9,517,640) Taxable profit / (loss) for the year 14,139,641 Tax losses brought forward (87,650,906) Utilization of tax losses 4,948,874 Tax losses carried forward (82,702,032) Total statutory income 14,139,641 Deductions; utilization of tax losses (4,948,874) Taxable income - other source of income 9,190,767 Concessionary rate @ 15% 867,952 Standard rate 1,191,547 SRL @ 1.5% 30,892 Total current tax for the year 2,090,391

2009 1,602,511 (92,537) 1,509,974 1,708,424 3,218,398 18,036,363 (5,965,500) 13,726,629 (9,604,370) 16,193,122 (93,317,724) 5,667,593 (87,650,131) 16,193,122 (5,667,593) 10,525,529 1,524,159 54,670 23,682 1,602,511

HVA Foods (Pvt) Ltd in the terms of the principal agreement entered in to with the Board of Investment (BOI) of Sri Lanka BOI Law No.04 of 1978 is liable to income tax at 15% of its taxable profit for a period of 20 years commencing from 1997. Social responsibility levy has been charged at the rate of 1.5% on the income tax liability in terms of the Social Responsibility Levy Act No.05 of 2005. The company has tax losses amounting to Rs.82,702,032/- (2009-Rs. 87,650,131/-) as at 31/03/2010. Deferred tax has been computed using the current effective tax rates applicable to company. 9 Basic earnings / (loss) per share The calculation of basic loss per share was based on the loss attributable to ordinary shareholders and weighted average number of ordinary shares outstanding during the year.



Profit for the year Weighted average number of ordinary shares Basic earning per share

2010

2009

54,274,768 1,500,002 36.18

14,817,965 1,500,002 9.88

HVA Foods Limited – Initial Public Offering |

95

NOTES TO THE FINANCIAL STATEMENTS (Contd.) All amounts in Sri Lanka Rupees

10 Property, plant & equipment Cost/valuation (Rs.) Free hold assets Land Buildings Motor vehicle Machinery Stores equipment Office equipment Furniture and fittings Name board Software equipments Capital-work-in-progress Lease hold assets Motor vehicle Machinery Total cost / valuation

As at 01-04-2009

Additions Revaluation / Transfer during the year

As at 31-03-2010

91,300,000 - 22,800,000 56,317,658 46,735 6,675,857 182,868 40 - 29,032,154 802,399 - 2,637,460 14,585 - 2,604,431 251,453 - 577,561 31,576 - - 119,234 - 644,855 - - - 50,185,559 - 183,296,987 51,451,580 29,475,857 6,319,154 - - 11,435,748 - - 17,754,902 - - 201,051,889 51,451,580 29,475,857

114,100,000 63,040,250 182,908 29,834,553 2,652,045 2,855,884 609,137 119,234 644,855 50,185,559 264,224,424

Accumulated depreciation (Rs.) As at Depreciation Revaluation 01-04-2009 for the year during the year Free hold depreciation Buildings 5,572,354 2,815,883 (8,388,237) Motor vehicles 98,772 45,726 - Machinery 21,443,502 3,178,531 - Stores equipment 1,670,631 661,381 - Office equipments 1,603,277 605,331 - Furniture and fittings 150,434 58,950 - Name board - 170 - Software equipments 452,652 161,214 - 30,991,622 7,527,187 (8,388,237) Lease hold depreciation Motor vehicles 3,225,597 1,579,778 - Machinery 8,723,832 2,033,937 - 11,949,429 3,613,715 - Total accumulated depreciation 42,941,051 11,140,902 (8,388,237) Carrying amount 158,110,838

As at 31.03.2010 144,498 24,622,033 2,332,012 2,208,608 209,384 170 613,866 30,130,572 4,805,375 10,757,769 15,563,144 45,693,716 236,285,570

Assets pledged as security against borrowings are disclosed in note no.31. The details of freehold land and buildings which are stated at revalued amounts are as follows.

Company property 1. Land situated at Linton Road, Kandana 2. Building situated at Linton Road, Kandana

96

6,319,114 11,435,748 17,754,862 281,979,286

Method of valuation Market value

Date of Amount Valuer valuation Rs. 31-03-2010 Rs.114,100,000/- Mr. P.B. Kalugalagedara

Market value

31-03-2010

| HVA Foods Limited – Initial Public Offering

Rs.63,040,250/- Mr. P.B. Kalugalagedara

NOTES TO THE FINANCIAL STATEMENTS (Contd.) All amounts in Sri Lanka Rupees

11 Inventories Raw material - Tea Raw material-ice tea concentrate & fruit base Flavours Packing materials Work in progress Finished goods Others Provision for slow moving inventories 12 Trade receivables Trade debtors Provision for doubtful debts (Note-12.a) 12.a

Provision for doubtful debts Balance as at 01st April Reversals of provisions during the year Provisions made during the year Balance as at 31st March

13 Amount due from / due to related party 13.a Amount due from related parties Relationship HVA Farm (Pvt) Ltd Common Directors HVA Beverage (Pvt) Ltd Common Directors HVA Lanka Exports (Pvt) Ltd Parent Company

2010

2009

16,872,187 1,450,544 3,203,106 22,986,545 3,045,880 1,358,108 506,233 49,422,603 (2,182,281) 47,240,322

16,931,376 1,810,336 4,911,704 21,197,957 36,089 3,091,934 47,979,396 (1,921,787) 46,057,609

109,005,164 (804,724) 108,200,440

76,443,906 (725,333) 75,718,573

725,333 - 79,391 804,724

1,719,578 (1,013,999) 19,754 725,333

- - 77,516,294 77,516,294

583,630 151,576 2,264,457 2,999,663

13.b Amount due to related parties Relationship Lake Drive Holdings (Pvt) Ltd Common Directors 9,609,746 Mrs. V.S.A. Fernando Director 6,580,973 16,190,719 14 Prepayments & other receivables VAT receivables ESC W.H.T. NBT receivables Insurance pre-payments Lease pre-payments Others deposits & pre-payments

8,940,944 - - 489,213 228,598 351,005 991,414 11,001,174

1,043,267 1,043,267

8,974,857 434,338 93,052 230,518 351,005 1,811,733 11,895,503

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97

NOTES TO THE FINANCIAL STATEMENTS (Contd.) All amounts in Sri Lanka Rupees



2010

2009

15 Deposits & advances Advance 1,590,336 Refundable deposits 83,741 Deposits 500,000 2,174,077

523,180 83,741 500,000 1,106,921

16 Cash and cash equivalents 16.a Short term deposits HSBC FD 500,000 Seylan bank FD 19,132,946 Bank of Ceylon - Fixed Deposits 4,894,604 Seylan bank exports bills S/A-044 800,932 BOC exports bills 902,506 Seylan bank exports bills margin A/C 3,510,981 29,741,969

764,192 18,555,199 9,913,295 1,342,620 2,765,926 33,341,232

16.b

1,216 6,034 109,554 186,905 1,643,361 476 2,379 1,713,454 5,527 26,791 3,695,697 37,036,929

Favourable balances HSBC 001-544097-025 USD FEC 274,590 HSBC 001-022787-101 USD FCBU 835,745 HSBC 001-544097-026 EUR EFC 3,684 HNB LKR A/C-0807010006412 16,472 BOC -USD - DFC - 9519983 627,591 Seylan bank-086401310140041USD EFC 9,509 Seylan bank-086401310140043EUR EFC 485 Seylan bank FCBU A/C-001 - Seylan bank LKR A/C -001 - Sampath bank LKR A/C-100 5,527 Cash in hand & cheques in hand 20,671 Total favourable balances 1,794,273 Total short term deposits & favourable balances 31,536,243

16.c Unfavourable balances/overdrafts HSBC-001544097001-LKR 445,354 Nations Trust Bank 5281 900 BOC-7630603-LKR 3,878,433 Seylan bank-086401310140001-LKR 4,279,949 Seylan bank991300090773001-USD-FCBU 46,043 Total unfavourable balances 8,650,680 Cash and cash equivalents in the cash flow statement 22,885,563 17 Stated capital 1,500,002 ordinary shares 15,000,020 15,000,020

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| HVA Foods Limited – Initial Public Offering

505,529 3,997,748 4,503,277 32,533,652

15,000,020 15,000,020

NOTES TO THE FINANCIAL STATEMENTS (Contd.) All amounts in Sri Lanka Rupees

The holders of ordinary shares are entitled to receive dividend from time to time and entitled to one vote per individual present at the meeting of shareholders or one vote per share in case of a poll.



2010

2009

18 Revaluation reserve Balance as at 01st April 96,136,854 96,136,854 During the year revaluation surplus 37,864,094 Balance as at 31st March 134,000,948 96,136,854 The revaluation was performed on freehold land and buildings as at 31st March 2010 by Mr. P.B. Kalugalagedara Chartered Valuation Surveyor using the market value method. 19

Retained earnings Balance as at 01st April (103,364,619) Net profit for the year 54,274,768 Balance as at 31st March (49,089,851)



Revenue reserve consists only of retained earnings.

20

Employee benefit Balance as at 1st April. 5,910,529 Provision for the year 1,438,631 Payments during the year (184,548) Balance as at 31st March 7,164,612

(118,182,584) 14,817,965 (103,364,619)

2,791,501 3,445,492 (326,464) 5,910,529

The employee benefit plan entitles a retired employee to receive payment equal to 1/2 of final salary multiplied by the number of completed years of service. However under the Payment of Gratuity Act No. 12 of 1983, the liability of the employee arises only on the completion of five year of continued service. The employee benefit plan valuation is carried out based on gratuity formula method in accordance with SLAS 16.

Principal assumptions as at balance sheet date (Expressed as weighted average) as follows:



2010

Discount rate as at 31st March 2010 8% Future salary increase 11%



2010

21 Interest bearing loans and borrowings 21.a Amount payable more than one year Lease creditors 4,210,871 Interest in suspense (660,915) 3,549,956 Term loans 132,033,500 Less: Payable within one year (27,266,574) 108,316,882

2009

8,695,091 (1,490,114) 7,204,977 139,963,983 (18,490,811) 128,678,149

HVA Foods Limited – Initial Public Offering |

99

NOTES TO THE FINANCIAL STATEMENTS (Contd.) All amounts in Sri Lanka Rupees



2010

2009

21.b Amount payable with in one year Bill discounting 86,704,972 71,152,698 Packing credit Loans 61,449,574 44,891,332 Payable within one year 27,266,574 18,490,811 175,421,120 134,534,841 22 Trade payable Tea creditors 249,170 240,193 Packing material creditors 30,791,512 19,871,407 Flavor creditors 1,896,806 653,261 Other creditors 267,584 270,634 33,205,072 21,035,495 23 Deposits & advances payable Debtors advance 4,517,989 598,094 Deposits from debtors 17,106,930 17,301,923 Other deposits & advances 59,461 74,961 21,684,380 17,974,978 24 Accrued expenses & other creditors Salary and related expenses payables 1,772,481 1,025,265 ESC payable 2,522,903 78,017 NBT - 23,265 Custom duty payables 56,273 47,466 Freight creditors 1,785,212 1,728,566 Interest payables 203,836 188,613 Other payables 10,307,534 8,868,107 16,648,239 11,959,299 25 Deferred tax assets Deferred tax assets Retiring gratuity (215,795) (516,824) Deferred tax liability Accelerated depreciation for tax purposes 1,277,757 2,225,248 Net deferred tax liability 1,061,962 1,708,424 The gross movement on the deferred income tax Balance as at 1st April 1,708,424 Provision/(reversal) made during the year (646,462) 1,708,424 Balance as at 31st March 1,061,962 1,708,424 Deferred tax asset of Rs. 12,405,305/- (2009-Rs. 13,147,520/-) on carried forward losses of Rs.82,708,043/(2009-Rs. 87,650,131/-) has not been recognized due to uncertainty. 26

Government grants Receipts during the year 29,402,272 Balance carried forward 29,402,272



The Asian Development Bank offered a grant of Rs. 40,793,651/- on 30/09/2009 to construct an ice tea plant.

100

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-

NOTES TO THE FINANCIAL STATEMENTS (Contd.) All amounts in Sri Lanka Rupees

27 Related parties 27.1 Transactions with key management personnel. Key management personnel include all the members of the Board of directors of the company having authority and responsibilities for planning , directing and controlling the activities of the company.

27.2 Key management personnel compensation Key management personnel compensation comprised, Short- term employee benefits including salaries

2010

2009

7,306,800

7,582,673

27.3 Key management personnel and director transactions Directors of the company control 100% of the voting shares of the company. Following directors are also directors of HVA Lanka Exports (Pvt) Ltd, Name of the director, Mr.A.R.H.Fernando Ms.V.A Fernando The aggregated value of transactions and outstanding balances relating to key management personnel were as follows; Director Transaction Transaction value Outstanding value 2010 2009 2010 2009 Ms. V.S.A.Fernando Loan obtained from the Director (Interest rate is 8% p.a) 5,000,000 - 5,000,000 Interest Accrued 1,580,793 - 1,580,793 27.4 Transactions with group companies and director transactions Company Relationship Nature of transaction Transaction Value (Rs.) 2010 2009 HVA Lanka Exports (Pvt) Ltd. Common Directors Sale of goods From subsidiary to parent 18,088,049 10,179,594 From parent to subsidiary 16,006,323 11,158,106 Expenses & other transactions From subsidiary to parent 239,144,875 318,850,728 From parent to subsidiary 165,975,009 257,878,096 HVA Farms (Pvt) Ltd Common Directors Reimbursement of expenses 262,570 64,535 Receivable written off 846,201 Lake Drive Holdings(Pvt) Ltd Common Directors Transport charges Interest expenses

HVA Beverage (Pvt) Ltd.

Common Directors Receivable written off

1,208,318 194,255

785,445 109,655

156,576

-

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NOTES TO THE FINANCIAL STATEMENTS (Contd.) All amounts in Sri Lanka Rupees

28 Financial arrangements for continuous operations Seylan Bank has made the following arrangements in HVA Foods (Pvt) Ltd with effect from 01st June 2008 which will enable the company to continue in business. a. Converted all Seylan Bank Rupee and Foreign Currency Term Loans to one restructured Foreign Currency Loan at an interest rate of 04% per annum with a one year grace period on capital re-payment. b. Transferred Hard Core of Packing Credit Loans and Bills Discounted balances to the same restructured Foreign Currency Term Loan. c. This Restructured Foreign Currency Term Loan is amounting Rs 126 Mn.(USD 1,170,000 /-) at 07% per annum repayable in four years with one year grace period. 29 Events after the balance sheet date No events identified since the balance sheet date, which may require a disclosure or an adjustment in the financial statements. 30 Commitment & contingencies The company has contingent liabilities on behalf of the following companies. Company name HVA Lanka Exports (Pvt) Ltd HVA Lanka Exports (Pvt) Ltd HVA Lanka Exports (Pvt) Ltd 31

Bank Lankaputhra Development Bank HSBC HSBC

Guarantee Primary mortgage -Land,building and machinery Corporate guarantee Issuance of guarantee

Amount (Rs.) 130 Mn 26.9 Mn 0.5 Mn

Assets pledged as securities The following assets of the company have been pledged as securities for liabilities as at the balance sheet date.

Bank Nature of the assets Nature of the liability Amount of. Securities Rs. Seylan Bank Land and Factory Building Term Loan, Packing 34 Mn Credit Loans, Export Bill,O/D Seylan Bank Stocks and packing materials Term Loan, Packing 64.6 Mn Credit Loans, Export Bill,O/D HSBC Stocks and packing materials Term Loan, Export Bill 26.9 Mn 32

Comparative information No comparative information has been reclassified during the year.

33 Directors responsibility The board of directors takes the responsibility for the preparation and presentation of these financial statements in accordance with Companies Act No. 07 of 2007 and Sri Lanka Accounting Standards. 34

No of employees The total number of employees of the company as at 31st March 2010 - 87 (as at 31st March 2009 - 92).

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DETAIL INCOME STATEMENT All amounts in Sri Lanka Rupees

For the year ended 31st March

2010

Revenue 488,206,319 Raw material consumed Raw material as at 01st April 44,851,373 Add: Raw Material purchases 353,094,219 Less: Stock written off (1,827,517) 396,118,075 Less: Raw material as at 31st March (44,512,381) Raw Material consumed during the year 351,605,694 Add: Work in progress as at 01st April 36,089 Less: Work in progress as at 31st March (3,045,880) 348,595,903 Direct expenses Custom duty 2,306,880 Freight charges 8,726,504 Inspection charges 734,476 Transport charges 873,991 Export expenses 880,723 Insurance on export 322,880 Salary - factory 2,562,274 Executive staff Salary - factory 293,494 Over time - factory staff 1,881,219 Casual wages 1,138 Over time - casual workers - Allowance - factory 59,586 Executive staff allowance - factory 28,350 E.P.F. -factory 311,906 E.P.F. -executive factory 35,021 E.T.F. -factory 77,976 E.T.F. -executive factory 8,805 E.P.F. -casual - E.T.F. -casual - E.P.F arrears expenses - Incentive / bonus 620,486 Gratuity 67,496 Staff welfare 263,225 Insurance - Factory 139,975 Electricity 1,224,981 Factory equipment maintenance 4,162 Import expenses 171,115 Maintenance of factory 295,875 Maintenance of machinery 625,099 Depreciation 5,873,850 Machinery hiring charges 250,919 Meals for factory workers 293,933 Uniform for factory staff 57,165 Customs license(C.H.A) renewal charges -

2009 402,379,235 33,913,668 283,398,126 (1,493,917) 315,817,877 (44,851,373) 270,966,504 1,837,224 (36,089) 272,767,639 2,042,703 8,300,539 362,375 737,436 497,657 280,199 2,213,531 290,030 1,462,645 142,778 140,739 223,738 23,940 251,676 34,804 62,979 8,702 14,610 3,653 192,000 98,625 188,349 70,632 71,890 948,440 1,082,102 305,939 361,086 2,479,950 123,500 207,123 15,275

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DETAIL INCOME STATEMENT (Contd.) All amounts in Sri Lanka Rupees

For the year ended 31st March

2010

Direct Expenses (contin…) Storage charges 303,383 Packing charges 13,211,312 PAL on imports 35,543 Ice tea production expenses 253,635 SLECIC - premium charges 677,394 Other consumption (257,240) Tea collection & tea room charges 686,509 Medical consultation 11,250 Vehicle hiring charges 141,750 Fuel charges 70,200 Security charges 266,025 Total direct expenditure 44,393,265 392,989,169 Add: Finished Goods as at 01st April 3,091,934 Less: Finished Goods as at 31st March (1,358,108) Cost of sales 394,722,994 Gross profit 93,483,325 Other income 28,832,656 122,315,982 Less: Expenditure Distribution expenses Advertising 98,559 Commission on sales 1,104,125 Business promotion expenses 3,491,922 Traveling expenses 21,051 Courier charges 386,966 Bad debts 71,150 Provision for bad debts 288,199 Local sales incentives 20,711 Foreign travels 1,543,580 Sales promotion expenses 135,658 Trade Mark Registration 592,129 Damage stock written off 613,538 Total distribution expenses 8,367,587

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2009 347,795 9,042,672 184,539 779,712 276,479 810,792 11,780 114,000 59,280 197,581 35,064,275 307,831,913 12,746,640 (3,091,934) 317,486,619 84,892,616 24,957,801 109,850,417 175,272 1,409,943 3,139,548 60,985 463,133 91,817 19,754 171,451 1,626,496 73,159 264,225 1,493,917 8,989,701

DETAIL INCOME STATEMENT (Contd.) All amounts in Sri Lanka Rupees

For the year ended 31st March

2010

Administration expenses Executive staff salaries 7,841,344 Non - executive salaries 1,246,392 Overtime 202,131 Allowances 2,578,485 Consultancy fees 1,176,633 R & D expenses 152,535 E.P.F / V.P.F 1,045,780 E.T.F 261,445 E.T.F - surcharge - Incentive - Vehicle hiring charges 2,043,117 Printing & stationeries 212,767 Fuel & oil 1,422,105 Legal / secretarial fee 382,558 Auditors remuneration 300,000 Audit fee - ISO 22000 125,994 Professional charges 489,528 SLECIC expenses 120,681 Insurance - vehicle & others 484,813 Vehicle maintenance 299,068 Office equipment maintenance 265,871 Land and building maintenance 598,462 Software maintenance 238,651 Staff welfare 263,225 Mobile phone charges 298,438 Medical expenses 57,357 Stamp duty 10,000 Security expenses 798,074 Electricity charges 306,245 Depreciation 5,267,052 Subscriptions 217,940 Telephone charges 589,329 Rates & taxes 72,967 Unrecoverable VAT 634,545 Provision for gratuity 202,489 Bonus & exgratia 39,600 Donation 27,000 Web Site development expenses 28,833 Entertainment 108,920 Provision for slow-moving inventories 1,474,473 Receivable/(Payable) written off/(back) 3,759,784 Staff training programme 20,844 Sundry expenses 8,256 Total administration expenses 35,673,730

2009 6,685,510 1,044,689 185,626 1,287,503 1,973,551 150,090 812,946 209,295 13,588 295,875 1,949,462 333,877 1,418,909 211,714 293,970 120,610 410,291 17,800 547,696 116,416 145,529 82,549 197,207 241,460 252,542 29,991 20,000 592,745 237,111 7,744,318 284,094 554,789 64,467 234,779 1,120,938 31,240 27,130 421,787 6,593 (1,408) 30,367,280

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DETAIL INCOME STATEMENT (Contd.) All amounts in Sri Lanka Rupees

For the year ended 31st March

2010

Finance Income Interest income 2,373,047 Interest from debtors 2,931,126 Gain on exchange rate fluctuation 1,934,388 7,238,561 Finance Expenses Loan interest - packing credit 4,344,913 Loan interest - term loan 8,979,346 Interest - Lake drive holdings (Pvt) Ltd. 194,255 Interest on lease rentals 875,736 Interest on bill discounts 8,703,599 Over due interest 1,057,032 Bank overdraft interest 1,802,810 Bill discount charges 1,361,892 Factoring charges 260,251 Bank charges 2,345,194 Loss on exchange rate fluctuation - 29,925,028 Net finance expense 22,686,467 Total expenditure (66,727,784) Profit before taxation 55,588,197 Income tax expenses (1,313,429) Profit for the year 54,274,768

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2009 4,080,066 1,848,552 5,928,618 3,219,842 6,395,414 109,655 1,626,001 5,884,475 1,907,548 2,829,232 1,192,094 85,239 2,601,340 32,534,850 58,385,691 52,457,072 (91,814,052) 18,036,363 (3,218,398) 14,817,965

INTERIM FINANCIAL STATEMENTS FOR THE PERIOD ENDED 30TH SEPTEMBER 2010

HVA Foods Limited – Initial Public Offering |

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HVA FOODS (PVT) LIMITED

INCOME STATEMENT All amounts in Sri Lanka Rupees

Group Company Year ended For the six months period ended 30.09.2010 30.09.2010 30.09.2009 31.03.2010 Note (Reviewed) (Reviewed) (Unaudited) (Audited) Revenue 4 Cost of sales

285,220,778 285,220,778 252,133,381 488,206,319 (236,559,871) (236,559,871) (211,561,406) (394,722,994)

Gross profit Other income 5 Distribution expenses Administration expenses

48,660,907 26,211,981 (7,486,146) (34,492,265)

48,660,907 26,211,981 (7,486,146) (34,492,265)

40,571,975 18,899,123 (5,266,180) (24,904,326)

93,483,325 28,832,656 (8,367,587) (35,673,730)

Results from operating activities

6

32,894,477

32,894,477

29,300,592

78,274,664

Finance income Finance costs

11,060,022 (14,310,351)

11,060,022 (14,310,351)

2,598,233 (15,331,290)

7,238,561 (29,925,028)

Net finance costs

7

(3,250,329)

(3,250,329)

(12,733,057) (22,686,467)

Profit before income tax Income tax expense 8

29,644,148 (2,576,526)

29,644,148 (2,576,526)

16,567,535 55,588,197 - (1,313,429)

Profit for the year

27,067,622

27,067,622

16,567,535

54,274,768

0.58

0.58

0.36

1.17

Basic earnings per share

9

The Accounting Policies and Notes form an integral part of these Financial Statements.

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HVA FOODS (PVT) LIMITED

BALANCE SHEET All amounts in Sri Lanka Rupees

Group Company As at 30.09.2010 30.09.2010 30.09.2009 31.03.2010 Note (Reviewed) (Reviewed) (Unaudited) (Audited) Assets Property, plant & equipment 10 245,817,834 245,817,834 153,591,941 236,285,570 Investment in subsidiary 11 - 45,000,000 - Intangible assets 12 44,938,998 - - Non-current assets 290,756,832 290,817,834 153,591,941 236,285,570 Inventories 13 Trade receivable 14 Amount due from related parties 15.a Pre-payments & other receivables 16 Income tax receivable Deposits & advances 17 Cash & cash equivalents 18 Current assets Total assets

42,736,713 42,736,713 109,182,123 109,182,123 107,977,776 107,977,776 9,647,632 9,647,632 2,777,613 2,777,613 3,660,487 3,660,487 38,011,931 37,940,926 313,994,275 313,923,270 604,751,107 604,741,104

36,606,365 47,240,322 123,212,207 108,200,440 15,488,290 77,516,294 17,576,814 11,001,174 - 3,702,935 3,273,832 2,174,077 37,689,573 31,536,243 233,847,081 281,371,485 387,439,022 517,657,055

Equity Stated capital 19 15,000,020 15,000,020 15,000,020 Revaluation reserve 20 134,000,948 134,000,948 96,136,854 Retained earnings 21 (22,022,229) (22,022,229) (86,797,084) Equity attributable to owners of the company 126,978,739 126,978,739 24,339,790 Non-controlling interests 3 - - Total equity 126,978,742 126,978,739 24,339,790

15,000,020 134,000,948 (49,089,851) 99,911,117 99,911,117

Liabilities Employee benefits 22 8,007,121 8,007,121 6,863,967 7,164,612 Interest-bearing loans and borrowings 23.a 103,437,963 103,437,963 120,738,170 108,316,882 Ice tea project - grant 24 29,402,272 29,402,272 2,120,187 29,402,272 Deferred income 5,000,000 5,000,000 - Deferred tax liabilities 25 1,122,974 1,122,974 - 1,061,962 Non-current liabilities 146,970,330 146,970,330 129,722,324 145,945,728 Trade payable 26 Amount due to related parties 15.b Interest-bearing loans and borrowings 23.b Deposits & advances payable 27 Income tax payable Accrued expenses & other creditors 28 Bank overdraft Current liabilities Total liabilities Total equity & liabilities

26,951,150 64,529,162 175,735,708 21,552,841 - 24,391,546 17,641,628 330,802,035 477,772,365 604,751,107

26,951,150 64,529,162 175,735,708 21,552,841 - 24,381,546 17,641,628 330,792,035 477,762,365 604,741,104

26,924,078 611,971 159,521,009 18,796,171 17,455 16,933,692 10,572,532 233,376,908 363,099,232 387,439,022

33,205,072 16,190,719 175,421,120 21,684,380 16,648,239 8,650,680 271,800,210 417,745,938 517,657,055

The Accounting Policies and Notes form an integral part of these Financial Statements. These financial statements are prepared in compliance with the requirements of the Companies Act No. 07 of 2007. Chief Financial Officer The board of directors is responsible for the preparation and presentation of these financial statements. For and behalf of the board. Director Colombo 19th November 2010

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Director

.

HVA FOODS (PVT) LIMITED

STATEMENT OF CHANGES IN EQUITY All amounts in Sri Lanka Rupees

For the six months period ended Consolidated

Attributable to equity holders of the company



Stated Revaluation capital reserves

Retained Total Non-controlling earnings interest

Total equity

Balance as at 01st April 2010 15,000,020 134,000,948 (49,089,851) 99,911,117 Effect of acquistions Profit for the period - - 27,067,622 27,067,622

- 99,911,117 3 3 - 27,067,622

Balance as at 30th September 2010 15,000,020 134,000,948 (22,022,229) 126,978,739

3 126,978,742

Company

Stated Revaluation capital reserves

Retained earnings

Total

Balance as at 01st April 2009 15,000,020 96,136,854 (103,364,619) 7,772,255 Profit for the period - - 16,567,535 16,567,535 Unaudited balance as at 30th September 2009 15,000,020 96,136,854 Surplus/(reversals) on revaluation of property - 37,864,094 Profit for the period - -

(86,797,084) 24,339,790

Balance as at 31st March 2010 15,000,020 134,000,948 Profit for the period - -

(49,089,851) 99,911,117 27,067,622 27,067,622

Balance as at 30 th September 2010 15,000,020 134,000,948

(22,022,229) 126,978,739

- 37,864,094 37,707,233 37,707,233

The Accounting Policies and Notes form an integral part of these Financial Statements.

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HVA FOODS (PVT) LIMITED

CASH FLOW STATEMENT All amounts in Sri Lanka Rupees

Group Company Year ended For the six months period ended 30.09.2010 30.09.2010 30.09.2009 31.03.2010 (Reviewed) (Reviewed) (Unaudited) (Audited) Cash flow from operating activities Profit before taxation 29,644,148 29,644,148 16,567,535 Adjustments for: Depreciation 4,353,609 4,353,609 5,759,517 Provision for gratuity 1,010,250 1,010,250 1,014,138 Provision for slow moving inventories 504,898 504,898 - Provision for bad debts - - - Interest expenses 12,546,720 12,546,720 13,100,838 Profit on disposal of property, plant and equipment (1,731,402) (1,731,402) - 46,328,223 46,328,223 36,442,028 Change in: - Inventories 3,998,710 3,998,710 9,451,244 - Trade receivables (981,683) (981,683) (47,493,634) - Prepayments & other receivables 1,353,542 1,353,542 (5,681,310) - Amount due from related party (30,461,482) (30,461,482) (12,488,627) - Deposits & advances receivables (1,486,410) (1,486,410) (2,166,911) - Trade payables (6,253,922) (6,253,922) 5,888,583 - Amount due to related party (3,096,716) (3,096,716) (431,296) - Deposits & advances payables (131,539) (131,539) 821,192 - Accrued expenses & other creditors 7,743,305 7,733,305 4,974,393 Cash generated/(used in) from operating activities 17,012,026 17,002,027 (10,684,337) Interest paid (12,111,561) (12,111,561) (13,100,838) Gratuity paid (167,741) (167,741) (60,700) Income tax paid (1,590,187) (1,590,187) 503,509 Net cash from/ (used in) operating activities 3,142,537 3,132,538 (23,342,366)

55,588,197 11,140,902 1,438,631 1,474,473 288,199 25,957,692 95,888,094 (2,657,186) (32,770,067) 892,510 (74,516,631) (1,289,223) 12,169,577 15,147,452 3,709,401 4,688,940 21,262,868 (25,735,624) (184,548) (3,466,529) (8,123,833)

Cash flows from investing activities Acquisition of property, plant and equipment (8,853,082) (8,853,082) (1,240,621) (51,451,541) Acquisition of subsidiary, net of cash acquired 61,006 - - Proceeds from sale of property, plant and equipment 7,698,611 7,698,611 - Net cash used in investing activities (1,093,465) (1,154,471) (1,240,621) (51,451,541) Cash flows from financing activities Ice tea project-grant - - 2,120,187 Change in finance lease liabilities 1,450,044 1,450,044 (1,669,030) Change in bank borrowings (6,014,376) (6,014,376) 18,715,218 Net cash flows from financing activities (4,564,332) (4,564,332) 19,166,375

29,402,272 (3,655,021) 24,180,033 49,927,284

Net decrease in cash and cash equivalents Cash and cash equivalents at 01st April Cash and cash equivalents as at the end of the period (Note A)

(2,515,259) 22,885,563

(2,586,264) 22,885,563

(5,416,612) 32,533,653

(9,648,090) 32,533,653

20,370,303

20,299,298

27,117,041

22,885,563

Note A -Cash and cash equivalents Cash in hand and cash at banks Bank overdrafts

38,011,931 37,940,926 37,689,573 (17,641,628) (17,641,628) (10,572,532)

31,536,243 (8,650,680)

Cash and cash equivalents at end of the period

20,370,303

22,885,563

20,299,298

27,117,041

The Accounting Policies and Notes form an integral part of these Financial Statements.

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NOTES TO THE FINANCIAL STATEMENTS 1.

Reporting entity HVA Foods (Pvt) Limited (the “Company”) is a company domiciled in Sri Lanka. HVA Foods (Pvt) Ltd is a wholly owned subsidiary of HVA Lanka Exports (Pvt) Ltd. The Company was incorporated on 22nd August 1997. The Registered Office of the company is located at No. 39 A, Linton Road, Kandana. The principal activity of the company is manufacturing and exporting of value added tea.

2.

Basis of preparation

(a)

Statement of compliance

reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.

3.

The accounting policies set out below have been applied consistently to all periods presented in these financial statements, and have been applied consistently by the company.

The interim financial statements of HVA Foods (Pvt) (a) Limited have been prepared in accordance with Sri Lanka Accounting Standards (SLASs) laid down by the Institute of Chartered Accountants of Sri Lanka and the requirements of the Companies Act No. 07 of 2007. (b)

Basis of consolidation

The interim financial statements were authorized for issue by the Board of Directors on 19th November 2010.

The financial statements of the Group represent the consolidation of the Financial Statements of the Company and its subsidiary.

(i)

(b) Basis of measurement The financial statements have been prepared on the historical cost basis. No adjustments have been made for inflationary factors in the financial statements.

(c)

Functional and presentation currency These financial statements are presented in the Sri Lanka rupees, which is the company’s functional currency. All financial information presented in Sri Lanka rupees has been rounded to the nearest rupee.

(d)

Significant accounting policies

Use of estimates and judgments The preparation of financial statements in conformity with SLASs requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results (ii) of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are

Change in accounting policies The accounting policies adopted are consistent with those used in the previous financial year.

Subsidiaries Subsidiaries are those entities controlled by the company. Control exists when the company has the power, directly or indirectly, to govern the financial and operating policies of an enterprise so as to obtain the benefits from its activities which is evident when the company controls the composition of the board of directors of the entity or hold more than 50% of the issued shares of the entity, or 50% of the voting rights of the entity, or is entitled to receive more than half of every dividend from shares carrying unlimited right to participate in distribution of profits or capital. Entities that are subsidiaries of another entity which is a subsidiary of the company are also treated as subsidiaries of the company. The financial statements of subsidiaries are included in the consolidated financial statements when control effectively commences and until control effectively ceases. The following companies have been consolidated. - HVA Foods (Pvt) Limited - Parent - HVA Holdings (Pvt) Limited - Subsidiary

Minority interest The proportion of the profit or loss after taxation applicable to outside shareholders of subsidiary companies is reflected under “Non-controlling Interests” in the consolidated financial statement. HVA Foods Limited – Initial Public Offering |

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NOTES TO THE FINANCIAL STATEMENTS (Contd.) The interest of outside shareholders in the net assets (f) employed of those companies are reflected under the (i) heading “Non-controlling Interests” in the balance sheet.

(iii) Goodwill Goodwill represents the excess of the cost of an acquisition of a subsidiary over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities acquired. Goodwill is initially recognized at cost. Such goodwill is identified into cash generating units and is annually tested for impairment. After initial recognition goodwill is stated at cost less accumulated impairment losses.

Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and are recognized net within “other income” in profit or loss. When re-valued assets are sold, the amounts included in the revaluation surplus reserve are transferred to retained earnings.

If the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities exceed the cost of the acquisition of the entity, it is recognised immediately in the consolidated income statement.

(iv) Reporting date

(v)

Transactions elimination on consolidation Intra group balances and income or expenses arising from intra-group transactions are eliminated in full in the consolidated financial statements.

(c)

Foreign currency Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currency at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the foreign exchange rate at that date. Foreign exchange differences arising on translation are recognized in profit or loss.

(d)

Investments Investments in subsidiary companies are valued at cost less provision for fall in value of investments and treated as non-current asset in the parent company’s financial statements.

Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the assets to a working condition for its intended use, and the costs of dismantling and removing the items and restoring the site on which they are located. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment.

The goodwill arising on acquisition of subsidiaries is presented as an intangible asset.

All the group’s subsidiaries have a common financial year.

Property, plant and equipment Recognition & measurement

(ii)

Subsequent costs The Company recognizes in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred if it is probable that the future economic benefits embodied with the item will flow to the company and the cost of the item can be measured reliably. All other costs are recognized in the income statement as an expenses as incurred.

(iii) Deprecation Depreciation of property, plant & equipment of the company is provided for on a consistent basis, over the period appropriate to the estimated useful lives of the assets. Generally assets are written off on a straight-line method over the following periods. Building Motor Vehicles Stores Equipments Furniture & Fittings Plant & Machinery Computers Software Equipments Tea Room Equipments

20 years 04 years 04 years 10 years 04 years 04 years 04 years 04 years

Land is not depreciated. Depreciation of an asset commences when the asset is available for use and ceases at the earlier of the date

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the asset is classified as held for sale and the date that the asset is derecognized.

existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of overheads based on normal operating capacity.

(iv) Revaluation Revaluation has been performed on freehold land and buildings by professionally qualified valuer using the market value method in the year ended 31/03/2010. The surplus is recognized on the net carrying value of the asset and is transferred to a revaluation reserve after restating the asset at the revalued amount. The company revalues land and buildings at least once in five years which is stated at its fair value at the date of revaluation less any subsequent impairment loss.

(v)

Leased assets

(i)

Trade receivables are stated at the amounts they are estimated to be realized net of provisions for bad and doubtful receivables. Other receivables and dues from related parties are recognized at cost less provision for bad and doubtful receivables.

(j)

The recoverable amount of an asset or cash-generating until is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cashgenerating unit”)

Other leases are operating leases and, are not recognized on the company’s balance sheet.

Intangible assets Basis of recognition An intangible asset is recognized if it is probable that future economic benefits that are attributable to the enterprise and the cost of the assets can be measured reliably in accordance with SLAS 37: Intangible Assets. Accordingly, these assets are stated in the balance sheet at cost less accumulated amortization and accumulated impairment losses (accounting policy j).

(ii)

An impairment loss is recognized if the carrying amount of an asset or its cash-generating unit exceeds its estimated recoverable amount. Impairment losses are recognized in profit or loss. Impairment losses recognized in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis.

Subsequent expenditure Subsequent expenditure is capitalized only when it increase the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including expenditure on internally generated goodwill and brands, is recognized in the profit or loss as incurred.

(h) Inventories Inventories are stated at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated cost necessary to make the sale. The cost of inventories is based on the Weighted – Average Cost principle and includes expenditure incurred in acquiring the inventories and bringing them to their

Impairment The carrying amounts of the company’s non-financial assets, other than inventories and deferred tax asset are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated.

Leases in terms of which the company assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset.

(g) (i)

Trade and other receivable

(k) (i)

Employee benefits Defined contribution plans The Company contributes 12% and 3% of gross salary to the Employees Provident Fund and Employees Trust Fund respectively, in terms of EPF Act No15 of 1958 as amended and to Employers Trust Fund in terms of the ETF Act No.46 of 1980 as amended.

(ii)

Defined benefit plans Provision has been made for retirement gratuities from the first year of service for all employees in

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115

NOTES TO THE FINANCIAL STATEMENTS (Contd.) conformity with the SLAS 16. However under the Payment of Gratuity Act No. 12 of 1983, the liability to an employee arises only on completion of 5 years of continued services.

(o)

The liability is not externally funded, nor actuarially valued. The Gratuity Liability is valued using Gratuity Formula method as required by the revised Sri Lanka Accounting Standard No.16 - Employee Benefits.

(l)

Provisions A provision is recognized when the company has a present obligation (legal or constructive) as a result of (p) a past event, where it is probable that an outflow of (i) resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the quantum of the outflow.

(m) Government grants A government grant is recognized in the balance sheet initially as deferred income when there is a reasonable assurance that it will be received and the conditions attached to it are complied with. Grants that compensate the group for expenses incurred are recognized as revenue in the income statement on a systematic basis in the periods in which the expense is incurred. Grants that compensate the group for the cost of an asset are recognized in the income statement as revenue on a systematic basis over the useful life.

(n) (i)

Revenue Goods sold Revenue from the sale of goods is recognized in the income statement when the significant risks and rewards of ownership have been transferred to the buyer. No revenue is recognized if there are significant uncertainties regarding recovery of the consideration due, associated costs or the possible return of goods also continuing management involvement with the goods.

(ii)

Interest Income Interest income recognized as it accrues in profit or loss.

(iii) Dividend income Dividend income is recognized in the income statement on the date that the entity`s right to receive payments is established.

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| HVA Foods Limited – Initial Public Offering

(ii)

Cash and cash equivalents Cash and cash equivalents are defined as cash in hand, demand deposits and short-term highly liquid investments, readily convertible to know amounts of cash and subject to insignificant risk of changes in value. For the purpose of cash flow statement, cash and cash equivalents consist of cash in hand and deposits in banks net of outstanding bank overdrafts. Investments with short maturities i.e. three months or less from the date of acquisition are also treated as cash equivalents.

Taxation Income tax The provision for income tax is based on the elements of income & expenditure as reported in the financial statements and computed in accordance with the provisions of the Inland Revenue Act No.10 of 2006 and amendments there to. The company enjoys a concessionary tax rate for 20 years from 1997 due to a BOI agreement.

Deferred tax Deferred tax is recognized using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit, and differences measured at the rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the balance sheet date. A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilized. Deferred tax assets are reviewed at each balance sheet date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

(iii) Economic service charges As per provisions of the Economic Service Charges Act No. 13 of 2006, economic service charges is payable on the liable turnover at specific rates. ESC is deductible from the income tax liability. Any unclaimed liability can be carried forward and set off against the income tax payable as per the relevant provision in the Act.

(iv) Social responsible levy (SRL)

(q)

(t)

As per the provisions of the Finance Act No 5 of 2005, as amended by the Finance Act No.11 of 2006, SRL was introduced with effect from 01st January 2005. SRL is payable at the rate of 1.5% on all taxes and levies chargeable.

A segment is a distinguishable component of the company that is engaged either in providing products or services (business segments), or in providing products or services with in a particular economic environment (geographical segment), which is subject to risk and rewards that are different from those of other segments.

Trade and other payables

Management believes that it is not practical to provide segmental disclosures relating to segment costs and expenses and subsequently segment profits and losses, since a realistic allocation cannot be made. The fixed assets used in the company’s business are not identifiable to any particular reportable segment and can be used interchangeably among segments. Consequently management believes that it is not practical to provide segmental disclosures relating to total assets since a realistic analysis among the various operating segments is not possible.

Trade and other payables are stated cost.

(r) (i)

Expenses Expenses recognition Expenses are recognized in the income statement on the basis of a direct association between the cost incurred and earning of specific item of income. All expenditure incurred in the running of the business and in maintaining the property, plant & equipment in state of efficiency has been charged to revenue in arriving at the profit for the year.

(ii)

(u) Comparative figures

Borrowing Cost Borrowing costs are recognized as an expense in the period in which they are incurred, except to the extent where borrowing costs that are directly attributable to the acquisition, construction, or production of an asset that takes a substantial period of time to get ready for its intended use or sale, are capitalized as part of that asset.

Whenever necessary comparative figures are reclassified to conform to the changes in presentation in the current year and disclosed as notes to the financial statements.

(v)

Minimum lease payments Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.

(iv) Finance income & expenses

(w) Events occurring after the balance sheet date All material post balance sheet events have been considered and where appropriate adjustments or disclosures have been made in respective notes to the financial statements.

(x)

Foreign currency gains and losses are reported on a net basis.

Earnings per share The group presents basic earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the company by the weighted average number of ordinary shares outstanding during the period.

Contingent liabilities Contingencies are possible assets or obligations that arise from a past event and would be confirmed only on the occurrence or non-occurrence of uncertain future events, which are beyond the company’s control.

Finance income comprises interest income on funds invested. Interest income is recognized as it accrues in profit or loss. Finance expenses comprise interest expenses on borrowings, bank charges and debit tax.

Cash flow statement The cash flow of the company has been presented in using “indirect method” in accordance with SLAS- 09: Cash flow statement

(iii) Finance lease payments

(s)

Segmental information

(y)

Directors responsibility The board of directors takes responsibility for the preparation and presentation of these financial statements in accordance with the Companies Act No. 07 of 2007 and the Sri Lanka Accounting Standards.

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117

HVA FOODS (PVT) LIMITED

NOTES TO THE FINANCIAL STATEMENTS (Contd.) All amounts in Sri Lanka Rupees

Group Company For the six months period ended 30.09.2010 30.09.2010 30.09.2009 (Reviewed) (Reviewed) (Unaudited) 4 Revenue Export sales 280,849,350 280,849,350 231,858,570 Local sales 4,371,428 4,371,428 20,274,811 285,220,778 285,220,778 252,133,381

461,489,725 26,716,594 488,206,319

5 Other income Sale of bin tea & dust 112,064 112,064 348,970 Brand promotion incentive - - - Packing income 21,191,148 21,191,148 18,392,586 Gain on sale of property plant & equip. 1,731,402 1,731,402 - Other income 136,007 136,007 157,567 Flavor Sales 33,010 33,010 - Receipts from Doubtful Debts 8,350 8,350 - Management Fee 3,000,000 3,000,000 - 26,211,981 26,211,981 18,899,123

802,283 297,937 27,428,218 304,218 28,832,656

Year ended 31.03.2010 (Audited)

6 Result from operating activities The result from operating activities is after charging all expenses including following, Auditors’ remuneration 252,000 252,000 161,346 300,000 Receivable/(payable) written off/(back) - - - 3,759,784 Provision for slow moving inventories 504,898 504,898 - 1,474,473 Legal expenses 474,177 474,177 627,376 382,558 Provision for gratuity 1,010,250 1,010,250 1,014,138 1,438,631 Salaries & wages 13,786,021 13,786,021 11,112,322 11,943,503 EPF 1,648,586 1,648,586 1,325,314 1,392,706 ETF 412,146 412,146 319,382 348,227 Bonus & incentive - - 2,439,600 620,486 Raw Material purchased 197,204,636 197,204,636 172,548,138 353,094,219 Direct expenses 36,187,479 36,187,479 29,140,237 44,393,265 7 Finance income and expense Finance income Interest income 562,168 562,168 2,137,550 2,373,047 Interest from debtors 187,858 187,858 460,683 2,931,126 Foreign exchange gain 10,309,996 10,309,996 - 1,934,388 11,060,022 11,060,022 2,598,233 7,238,561 Finance costs Loan interest - packing credit (1,966,600) (1,966,600) (2,451,574) (4,344,913) Loan interest - term loan (4,241,082) (4,241,082) (4,423,258) (8,979,346) Interest - Lake Drive Holdings (Pvt) Ltd. (168,000) (168,000) (43,719) (194,255) Interest - Mrs.V.S.A.Fernando (267,159) (267,159) - Interest on lease rentals (671,513) (671,513) (448,152) (875,736) Interest on bill discounts (3,874,537) (3,874,537) (4,708,475) (8,703,599) Over due interest (519,428) (519,428) (169,143) (1,057,032) Bank overdraft interest (838,401) (838,401) (856,517) (1,802,810) Bill discount charges (611,601) (611,601) (754,618) (1,361,892) Factoring charges (89,362) (89,362) (45,450) (260,251) Bank charges (1,062,669) (1,062,669) (1,429,705) (2,345,194) Foreign Exchange loss - - (679) (14,310,351) (14,310,351) (15,331,290) (29,925,028) Net finance costs (3,250,329) (3,250,329) (12,733,057) (22,686,467)

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| HVA Foods Limited – Initial Public Offering

All amounts in Sri Lanka Rupees

Group Company For the six months period ended 30.09.2010 30.09.2010 30.09.2009 (Reviewed) (Reviewed) (Unaudited) 8 Income tax expense 8.a Income tax recognized in profit or loss Current income tax Current tax charges 3,004,806 3,004,806 - (Over) / under provision of previous period (489,292) (489,292) - 2,515,514 2,515,514 - Deferred tax expense Deferred tax charge / (reversal) (Note-25) 61,012 61,012 - Income tax for the period 2,576,526 2,576,526 - 8.b Reconciliation of accounting profit to tax expenses Profit before tax 29,644,148 29,644,148 - Exempt Income & other source of income (10,793,344) (10,793,344) - Aggregate disallowable expenses 15,649,410 15,649,410 - Aggregate allowable expenses (4,137,131) (4,137,131) - Taxable income for the period 30,363,083 30,363,083 - Tax losses brought forward (82,702,032) (82,702,032) - Utilization of tax losses 10,627,079 10,627,079 - Tax losses carried forward (72,074,953) (72,074,953) - Total statutory income 30,363,083 30,363,083 - Utilization of tax losses (10,627,079) (10,627,079) - Taxable income for the period-other sources of income 19,736,004 19,736,004 - Concessionary rate @ 15% 2,960,400 2,960,400 - Standard rate - - - SRL @ 1.5% 44,406 44,406 - Total current tax for the period 3,004,806 3,004,806 -

Year ended 31.03.2010 (Audited)

2,090,391 (130,500) 1,959,891 (646,462) 1,313,429 55,588,197 (56,521,908) 24,590,992 (9,517,640) 14,139,641 (87,650,906) 4,948,874 (82,702,032) 14,139,641 (4,948,874) 9,190,767 867,952 1,191,547 30,892 2,090,391

HVA Foods (Pvt) Ltd in the terms of the principal agreement entered in to with the Board of Investment (BOI) of Sri Lanka BOI Law No.04 of 1978 is liable to income tax at 15% of its taxable profit for a period of 20 years commencing from 1997. Social responsibility levy has been charged at the rate of 1.5% on the income tax liability in terms of the Social Responsibility Levy Act No.05 of 2005.

The company has tax losses amounting to Rs.72,074,953/- (31/03/2009-Rs. 82,708,268/-) as at 30/09/2010.



Deferred tax has been computed using the current effective tax rates applicable to the company.

9 Basic earnings per share (EPS) The calculation of basic earnings per share was based on the earnings attributable to ordinary shareholders and weighted average number of ordinary shares outstanding during the year. 30.09.2010 30.09.2010 (Reviewed) (Reviewed) Profit for the period 27,067,622 27,067,622 Weighted average number of ordinary shares 46,500,062 46,500,062 Basic earning per share 0.58 0.58 Annualized basic earning per share 1.16 1.16

Restated 30.09.2009 (Unaudited) 16,567,535 46,500,062 0.36 0.71

Restated 31.03.2010 (Audited) 54,274,768 46,500,062 1.17 1.17

EPS for 2009/10 has been restated to give effect to the share split during the year (Note-19). The number of shares as previously reported was 1,500,002 and subsequent to the share split 46,500,062 shares was used to compute the EPS for 2009/10. HVA Foods Limited – Initial Public Offering |

119

HVA FOODS (PVT) LIMITED

NOTES TO THE FINANCIAL STATEMENTS (Contd.) All amounts in Sri Lanka Rupees

10 Property, plant & equipment 10.1 Property, plant & equipment - Consolidated Cost / Valuation Free hold assets Land Buildings Motor vehicle Machinery Stores equipment Office equipment Furniture and fittings Name board Software equipments Lease hold assets Motor vehicle Machinery Total cost / valuation

As at 01-04-2010

Additions / Transfer

Disposals / Transfer

As at 30-09-2010

114,100,000 63,040,250 182,908 29,834,553 2,652,045 2,855,884 609,137 119,234 644,855 214,038,866

6,000,000 - 120,100,000 104,210 - 63,144,460 1,069,565 - 1,252,473 1,054,333 - 30,888,886 - - 2,652,045 212,900 - 3,068,784 26,075 - 635,212 - - 119,234 - - 644,855 8,467,082 - 222,505,948 6,319,114 - (6,319,114) 11,435,748 5,000,000 (8,135,748) 8,300,000 17,754,862 5,000,000 (14,454,862) 8,300,000 231,793,728 13,467,082 (14,454,862) 230,805,948

As at Depreciation Disposals / As at Accumulated depreciation 01-04-2010 for the year Transfer 30-09-2010 Free hold depreciation Buildings - 1,577,595 - 1,577,595 Motor vehicles 144,498 8,227 1,069,566 1,222,291 Machinery 24,622,033 1,204,151 - 25,826,184 Stores equipment 2,332,012 120,770 - 2,452,782 Office equipments 2,208,608 165,918 - 2,374,526 Furniture and fittings 209,384 30,984 - 240,368 Name board 170 5,962 - 6,132 Software equipments 613,866 15,495 - 629,361 30,130,572 3,129,102 1,069,566 34,329,239 Lease hold depreciation Motor vehicles 4,805,375 546,529 (5,351,904) Machinery 10,757,769 677,978 (8,135,748) 3,299,999 15,563,144 1,224,507 (13,487,652) 3,299,999 Total accumulated depreciation 45,693,716 4,353,609 (12,418,086) 37,629,238 Capital-work-in-progress 50,185,559 2,455,565 - 52,641,124 Carrying amount 236,285,570 245,817,834

120

| HVA Foods Limited – Initial Public Offering

All amounts in Sri Lanka Rupees

10 Property, plant & equipment (Contd.) 10.2 Property, plant & equipment - Company Cost / Valuation Free hold assets Land Buildings Motor vehicle Machinery Stores equipment Office equipment Furniture and fittings Name board Software equipments Lease hold assets Motor vehicle Machinery Total cost / valuation

As at 01-04-2010

Additions / Transfer

Disposals / Transfer

As at 30-09-2010

114,100,000 63,040,250 182,908 29,834,553 2,652,045 2,855,884 609,137 119,234 644,855 214,038,866

6,000,000 - 120,100,000 104,210 - 63,144,460 1,069,565 - 1,252,473 1,054,333 - 30,888,886 - - 2,652,045 212,900 - 3,068,784 26,075 - 635,212 - - 119,234 - - 644,855 8,467,082 - 222,505,948 6,319,114 - (6,319,114) 11,435,748 5,000,000 (8,135,748) 8,300,000 17,754,862 5,000,000 (14,454,862) 8,300,000 231,793,728 13,467,082 (14,454,862) 230,805,948

As at Depreciation Disposals / As at Accumulated depreciation 01-04-2010 for the year Transfer 30-09-2010 Free hold depreciation Buildings - 1,577,595 - 1,577,595 Motor vehicles 144,498 8,227 1,069,566 1,222,291 Machinery 24,622,033 1,204,151 - 25,826,184 Stores equipment 2,332,012 120,770 - 2,452,782 Office equipments 2,208,608 165,918 - 2,374,526 Furniture and fittings 209,384 30,984 - 240,368 Name board 170 5,962 - 6,132 Software equipments 613,866 15,495 - 629,361 30,130,572 3,129,102 1,069,566 34,329,239 Lease hold depreciation Motor vehicles 4,805,375 546,529 (5,351,904) Machinery 10,757,769 677,978 (8,135,748) 3,299,999 15,563,144 1,224,507 (13,487,652) 3,299,999 Total accumulated depreciation 45,693,716 4,353,609 (12,418,086) 37,629,238 Capital-work-in-progress 50,185,559 2,455,565 - 52,641,124 Carrying amount 236,285,570 245,817,834 10.3 Assets pledged as security against borrowings are disclosed in note no.33. 10.4 The details of freehold land and buildings which are stated at revalued amounts are as follows. Company property Method of Date of Extent Valuation Valuer valuation valuation of Land Rs. 1. Land situated at Linton Road, Kandana Market value 31-03.2010 200 Perchaes Rs.114,100,000/- Mr.P.B.Kalugalagedara 2 Building situated at Linton Road, Kandana Market value 31-03.2010 - Rs.63,040,250/- Mr.P.B.Kalugalagedara 10.5 Land purchsed during the period Land situated at Extent of land Linton Road, Kandana 20 Perchaes

Cost of purchased Rs. Rs.6,000,000

Valuation as at 31/03/2010Rs. Rs.6,000,000

HVA Foods Limited – Initial Public Offering |

121

HVA FOODS (PVT) LIMITED

NOTES TO THE FINANCIAL STATEMENTS (Contd.) All amounts in Sri Lanka Rupees

11 Investment Group Company 30.09.2010 30.09.2010 30.09.2009 31.03.2010 (Reviewed) (Reviewed) (Unaudited) (Audited) Nature of % business holding Non-quoted Investment Ordinary shares of HVA Investing Holdings (Pvt) Ltd. company 99.99% - 45,000,000 - (The company - 45,000,000 - has not still commenced its operations.) 12 Intangible Assets Brand Balance as at 1st April - - - Additions 44,938,998 - - Impairment during the year - - - Balance as at the end of the period 44,938,998 - - Intangible assets represents the excess of the cost of the business combination over the fair value of identifiable net assets, liabilities and contingent liabilities of the subsidiary i,e HVA Holdings Pvt Limited as at the date of acquisition. The company acquired HVA Holding (Pvt) Ltd on 29th September 2010 in order to use the international brand,” HELADIV” owned by HVA Holding (Pvt) Ltd, as per the Valuation report given by Price Waterhouse Coopers on 1st October 2010. The “HELADIV” brand has been valued by royalty methord, based on the five-year forecast sales projects provided by the management and the bellow-mentioned royalty rates, and have assessed the indicative value of the brand as at 31st December 2009 to be in the order of USD 1.08mn to USD 1.24mn (with a mid-point value of USD 1.16mn)

Adopted the following royalty rates for the respective market segments served by the Company. - Russia & the CIS states - 6% royalty rate on net sales generated from the region. - Far East Asia - 6% royalty rate on net sales generated from the region. - Europe, Americas, & Africa - 4% royalty rate on net sales generated from the region. - New Markets & products - 3% royalty rate on net sales generated from the region.



The exchange rate applied to the cash flow projection = 11.2%

13 Inventories Raw material - Tea Raw material-ice tea concentrate & fruit base Flavours Packing materials Work in progress Finished goods Others Provision for slow moving inventories

122

| HVA Foods Limited – Initial Public Offering

11,373,182 1,063,170 5,210,167 25,523,321 23,664 1,310,241 920,147 45,423,893 (2,687,179) 42,736,713

11,373,182 1,063,170 5,210,167 25,523,321 23,664 1,310,241 920,147 45,423,893 (2,687,179) 42,736,713

8,241,913 1,734,372 3,379,169 22,388,663 31,644 2,330,604 - 38,106,365 (1,500,000) 36,606,365

16,872,187 1,450,544 3,203,106 22,986,545 3,045,880 1,358,108 506,233 49,422,603 (2,182,281) 47,240,322

All amounts in Sri Lanka Rupees

Group Company 30.09.2010 30.09.2010 30.09.2009 31.03.2010 (Reviewed) (Reviewed) (Unaudited) (Audited) 14 Trade receivables Trade debtors 109,485,635 109,485,635 123,937,540 109,005,164 Provision for doubtful debts (Note-14.a) (303,512) (303,512) (725,333) (804,724) 109,182,123 109,182,123 123,212,207 108,200,440 14.a Provision for doubtful debts Balance as at 1st April 804,724 804,724 725,333 725,333 Reversals of provisions during the period (501,212) (501,212) - Provisions made during the period - - - 79,391 Balance as at the end of the period 303,512 303,512 725,333 804,724 15 Amount due from / due to related party 15.a Amount due from related parties Relationship HVA Farms (Pvt) Ltd Common Directors 518,081 518,081 582,331 HVA Beverages (Pvt) Ltd Common Directors - - 151,576 HVA Lanka Exports (Pvt) Ltd Parent Company 107,459,695 107,459,695 14,754,383 77,516,294 107,977,776 107,977,776 15,488,290 77,516,294 15.b Amount due to related parties Relationship Lake Drive Holdings (Pvt) Ltd Common Directors 55,681,030 55,681,030 611,971 9,609,746 Mr. A.R.H. Fernando Director 2,000,000 2,000,000 - Mrs. V.S.A. Fernando Director 6,848,132 6,848,132 - 6,580,973 64,529,162 64,529,162 611,971 16,190,719 16 Prepayments & other receivables VAT receivables 7,685,494 7,685,494 10,645,160 8,940,944 W.H.T. - - 203,405 NBT receivables 693,556 693,556 144,074 489,213 Economic Service Charge - - 4,506,696 Insurance pre-payments 443,760 443,760 627,099 228,598 Lease pre-payments - - 351,005 351,005 Others deposits & pre-payments 824,822 824,822 1,099,375 991,414 9,647,632 9,647,632 17,576,814 11,001,174 17 Deposits & advances Advance 2,676,746 2,676,746 2,690,091 Refundable deposits 83,741 83,741 83,741 Deposits 900,000 900,000 500,000 3,660,487 3,660,487 3,273,832 18 Cash and cash equivalents Short term deposits 35,637,092 35,637,092 29,136,130 Cash at bank 2,374,839 2,303,834 8,553,442 38,011,931 37,940,926 37,689,573 19 Stated capital 46,500,062 ordinary shares (31.03.2010 - 1,500,002 ordinary shares) 15,000,020 15,000,020 15,000,020 15,000,020 15,000,020 15,000,020

1,590,336 83,741 500,000 2,174,077 29,741,969 1,794,273 31,536,243

15,000,020 15,000,020

HVA Foods Limited – Initial Public Offering |

123

HVA FOODS (PVT) LIMITED

NOTES TO THE FINANCIAL STATEMENTS (Contd.) All amounts in Sri Lanka Rupees

The company has sub divided one ordinary shares into 31 ordinary shares thereby increasing the number of the ordinary shares to 46,500,062 shares. The special resolution passed on 29th September 2010 for this purpose. The holders of ordinary shares are entitled to receive dividend from time to time and entitled to one vote per individual present at the meeting of shareholders or one vote per share in case of a poll. Group Company Year ended For the six months period ended 30.09.2010 30.09.2010 30.09.2009 31.03.2010 (Reviewed) (Reviewed) (Unaudited) (Audited) 20 Revaluation reserve Balance as at 1st April 134,000,948 134,000,948 96,136,854 96,136,854 During the period revaluation surplus - - - 37,864,094 Balance as at the end of the period 134,000,948 134,000,948 96,136,854 134,000,948 The revaluation was performed on freehold land and buildings as at 31st March 2010 by Mr.P.B. Kalugalagedara Chartered Valuation Surveyor using the market value method. 21 Retained earnings Balance as at 1st April (49,089,851) (49,089,851) (103,364,619) (103,364,619) Net profit for the period 26,884,716 26,884,716 16,567,535 54,274,768 Balance as at the end of the period (22,205,135) (22,205,135) (86,797,084) (49,089,851) Revenue reserve consists only of retained earnings. 22 Employee benefit Balance as at 1st April 7,164,612 7,164,612 5,910,529 5,910,529 Provision for the period 1,010,250 1,010,250 1,014,138 1,438,631 Payments during the period (167,741) (167,741) (60,700) (184,548) Balance as at the end of the period 8,007,121 8,007,121 6,863,967 7,164,612 The employee benefit plan entitles a retired employee to receive payment equal to 1/2 of final salary multiplied by the number of completed years of service. However under the Payment of Gratuity Act No. 12 of 1983, the liability of the employee arises only on the completion of five year of continued service. The employee benefit plan valuation is carried out based on gratuity formula method in accordance with SLAS 16.

Principal assumptions as at balance sheet date (Expressed as weighted average) as follows: Discount rate as at 30th September 2010 8% 8% - Future salary increase 11% 11% -

23 Interest bearing loans and borrowings 23.a Amount payable more than one year Future minimum lease payments 7,081,392 7,081,392 6,577,909 Interest (2,081,392) (2,081,392) (1,041,962) Present value of minimum lease payments 5,000,000 5,000,000 5,535,947 Term loans 124,138,000 124,138,000 132,719,737 Less: Payable within one year (25,700,037) (25,700,037) (17,517,514) 103,437,963 103,437,963 120,738,170

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8% 11%

4,210,871 (660,915) 3,549,956 132,033,500 (27,266,574) 108,316,882

All amounts in Sri Lanka Rupees

Group Company Year ended For the six months period ended 30.09.2010 30.09.2010 30.09.2009 31.03.2010 (Reviewed) (Reviewed) (Unaudited) (Audited) 23.b Amount payable with in one year Bill discounting 87,823,523 87,823,523 108,229,642 86,704,972 Packing credit Loans 62,212,148 62,212,148 33,773,853 61,449,574 Payable within one year 25,700,037 25,700,037 17,517,514 27,266,574 175,735,708 175,735,708 159,521,009 175,421,120 24 Government grants Balance brought forward 29,402,272 29,402,272 - Receipts during the period - - 2,120,187 29,402,272 Balance carried forward 29,402,272 29,402,272 2,120,187 29,402,272 The Asian Development Bank offered a grant of Rs. 40,793,651/- on 30/09/2009 to construct an ice tea plant. 25 Deferred tax assets Deferred tax assets Tax effect of retiring gratuity (151,538) (151,538) - (215,795) Deferred tax liability Tax effect of property, plant & equipment 1,274,512 1,274,512 - 1,277,757 Net deferred tax liability 1,122,974 1,122,974 - 1,061,962 The gross movement on the deferred income tax Balance as at 1st April 1,061,962 1,061,962 - 1,708,424 Provision/(reversal) made during the period 61,012 61,012 - (646,462) Balance as at the end of the period 1,122,974 1,122,974 - 1,061,962 Deferred tax asset of Rs. 10,811,243/- (31/03/2009-Rs. 12,406,206/-) on carried forward losses of Rs. 72,074,953/(31/03/2009-Rs. 82,708,043/-) has not been recognized due to uncertainty. 26 Trade payable Tea creditors 360,456 360,456 442,767 Packing material creditors 23,339,712 23,339,712 24,750,862 Flavor creditors 2,988,442 2,988,442 1,461,105 Other creditors 262,540 262,540 269,344 26,951,150 26,951,150 26,924,078 27 Deposits & advances payable Debtors advance 4,708,939 4,708,939 1,517,284 Deposits from debtors 16,784,441 16,784,441 17,219,426 Other deposits & advances 59,461 59,461 59,461 21,552,841 21,552,841 18,796,171 28 Accrued expenses & other creditors Salary and related expenses payables 1,634,008 1,634,008 3,007,983 ESC payable 3,098,051 3,098,051 - Custom duty payables 93,668 93,668 135,655 Freight creditors 2,613,017 2,613,017 1,777,675 Interest payables 709,238 709,238 1,492,400 Other payables 16,243,564 16,233,564 10,519,979 24,391,546 24,381,546 16,933,692

249,170 30,791,512 1,896,806 267,584 33,205,072 4,517,989 17,106,930 59,461 21,684,380 1,772,481 2,522,903 56,273 1,785,212 203,836 10,307,534 16,648,239

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HVA FOODS (PVT) LIMITED

NOTES TO THE FINANCIAL STATEMENTS (Contd.) All amounts in Sri Lanka Rupees

Group Company Year ended For the six months period ended 30.09.2010 30.09.2010 30.09.2009 31.03.2010 (Reviewed) (Reviewed) (Unaudited) (Audited) 29 Related parties disclosures 29.1 Transactions with key management personnel. Key management personnel include all the members of the Board of directors of the company having authority and responsibilities for planning , directing and controlling the activities of the company. 29.2 Key management personnel compensation Key management personnel compensation comprised, Short- term employee benefits including salaries 3,995,280 3,995,280 3,653,400 7,306,800 29.3 Key management personnel and director transactions Directors of the company control 100% of the voting shares of the company. Following directors are also directors of HVA Lanka Exports (Pvt) Ltd, Name of the director, Mr.A.R.H.Fernando Mrs.V.A Fernando The aggregated value of transactions and outstanding balances relating to key management personnel were as follows; Director Mr. A.R.H.Fernando Loan obtained from the Director (Interest free loan) - Transaction value 2,500,000 2,500,000 - - Outstanding value 2,000,000 2,000,000 - Mrs. V.S.A.Fernando Loan obtained from the Director (Interest rate is 8% p.a) - Transaction value - Loan - - - 5,000,000 - Interest 267,159 267,159 - 1,580,793 - Outstanding value - Loan 5,000,000 5,000,000 - 5,000,000 - Interest 1,848,132 1,848,132 - 1,580,973 29.4

Transactions with group companies and director transactions Company Relationship HVA Lanka Exports (Pvt) Ltd. Common Directors Nature of transaction Contract packing income From subsidiary to parent 250,264 250,264 - Management fees received From subsidiary to parent 3,000,000 3,000,000 - Sale of goods From subsidiary to parent 1,609,671 1,609,671 14,077,747 18,088,049 From parent to subsidiary 3,831,535 3,831,535 7,131,056 16,006,323 Expenses & other transactions From subsidiary to parent 115,120,043 115,120,043 72,525,534 239,144,875 From parent to subsidiary 72,690,531 72,690,531 9,783,527 165,975,009

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HVA Farms (Pvt) Ltd Common Directors Nature of transaction Reimbursement of expenses 518,081 518,081 - 262,570 Receivable written off - - - 846,201 Lake Drive Holdings(Pvt) Ltd Common Directors Nature of transaction Transport charges 106,174 106,174 - 1,208,318 Interest expenses 402,788 402,788 - 194,255 Purchase consideration on acquisition of HVA Holding (Pvt) Ltd - 45,000,000 - Purchased of a land 6,000,000 6,000,000 - HVA Beverage (Pvt) Ltd Common Directors Nature of transaction Receivable written off - - - 156,576 For the year end outstanding balances refer note 15 to the Financial Statements. 30 Financial arrangements for continuous operations Seylan Bank has made the following arrangements in HVA Foods (Pvt) Ltd with effect from 01st June 2008 which will enable the company to continue in business. a. Converted all Seylan Bank Rupee and Foreign Currency Term Loans to one restructured Foreign Currency Loan at a lower interest rate of 04% per annum with a one year grace period on capital re-payment. b. Transferred Hard Core of Packing Credit Loans and Bills Discounted balances to the same restructured Foreign Currency Term Loan. c. This Restructured Foreign Currency Term Loan is amounting Rs 126 Man.(USD 1,170,000 /-) at 07% per annum repayable in four years with one year grace period. 31 Events after the balance sheet date No events identified since the balance sheet date, which may require a disclosure or an adjustment in the financial statements except for the following. - The company has become a public limited company since 03rd November 2010. 32 Commitment & contingencies The company has contingent liabilities on behalf of the following companies. Company name Bank Guarantee HVA Lanka Exports (Pvt) Ltd Lankaputhra Primary, Development Bank mortgage-Land HVA Lanka Exports (Pvt) Ltd HSBC Corporate guarantee HVA Lanka Exports (Pvt) Ltd HSBC Issuance of guarantee

Amount (Rs.) 130 Mn 26.9 Mn 0.5 Mn

33 Assets pledged as securities The following assets of the company have been pledged as securities for liabilities as at the balance sheet date. Bank Nature of Nature of Amount of Rs. the assets the liability Securities Seylan Bank Land and Factory Building Term Loan, Packing 34 Mn Credit Loans, Export Bill,O/D Seylan Bank Stocks and packing materials Term Loan, Packing 64.6 Mn Credit Loans, Export Bill,O/D HSBC Stocks and packing materials Term Loan, Export Bill 26.9 Mn 34

Comparative information No comparative information has been reclassified during the year.

35 Directors responsibility The board of directors takes the responsibility for the preparation and presentation of these financial statements in accordance with Companies Act No. 07 of 2007 and Sri Lanka Accounting Standards. 36

No of employees The total number of employees of the company as at 30th September 2010 - 89 (as at 31st March 2010 - 87).

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ANNEXURE A – INDEX ON TABLES ILLUSTRATED IN THE PROSPECTUS List of Tables Table 4-1: Forecast of Total Sales Volumes for the Russian Market.............................................................................................................................................32 Table 4-2: CIS and Russian Federation: Historical Movement of Values and Volumes Exported..............................................................................32 Table 4-3: CIS and Russian Federation: Forecasted Movement of Values and Volumes Exported..........................................................................33 Table 4-4: Far Eastern Region: Historical Movement of Values and Volumes Exported.................................................................................................34 Table 4-5: Far Eastern Region: Forecasted Movement of Values and Volumes Exported.............................................................................................35 Table 4-6: Far Eastern Region: Forecasted Export Mix.........................................................................................................................................................................35 Table 4 -7: Cumulative Export Values, Volumes, and Average Price Comparison 2009 vs. Forecasted for 2010............................................35 Table 4-8: Europe, Americas and African Region: Historical Movement of Values and Volumes Exported.......................................................36 Table 4-9: Europe, Americas and African Region: Forecasted Movement of Values and Volumes Exported...................................................37 Table 4-10: Europe, Americas and African Region: Forecasted Export Mix...........................................................................................................................37 Table 4-11: Cumulative Export Values, Volumes, and Average Price Comparison 2009 vs. Forecasted for 2010...........................................37 Table 4-12: New Markets: Forecasted Movement of Values and Volumes Exported.......................................................................................................38 Table 4-13: Market Wise Breakup of Export Volumes Forecasted to be Generated from New Markets..............................................................38 Table 4-14: Top Ten Sri Lankan Exporters of Value Added Tea.......................................................................................................................................................39 Table 4-15: Loan Facilities – HVA Foods Limited.....................................................................................................................................................................................40 Table 4-16: Ownership Structure of HVA Holdings (Private) Limited . .....................................................................................................................................42 Table 5-1: Contribution of the Tea Industry to Export Earnings . ................................................................................................................................................43 Table 5-2: World’s Top Five Tea Producing Countries..........................................................................................................................................................................44 Table 5-3: World’s Top Five Tea Exporting Countries............................................................................................................................................................................45 Table 5-4: Sri Lanka’s Top Five Export Markets.........................................................................................................................................................................................46 Table 5-5: Volume of Sri Lankan Tea Exports.............................................................................................................................................................................................47 Table 5-6: World’s Top Ten Tea Importing Countries............................................................................................................................................................................48 Table 6-1: Composition of Private Consumption Expenditure at Current Market Prices..............................................................................................49 Table 6-2: Comparative PCE Performance.................................................................................................................................................................................................49 Table 6-3 Growth in Number of Sri Lankan Super Markets/Organized Retail Channels...............................................................................................51 Table 6-4: Market Share of Global Carbonated Soft Drinks.............................................................................................................................................................51 Table 6-5: Forecast Growth Rates for Non-Carbonated Drinks.....................................................................................................................................................51 Table 6-6: Growth Rates for RTD Tea..............................................................................................................................................................................................................52 Table 9-1: Details of HVA Foods Limited Board of Directors...........................................................................................................................................................56 Table 9-2: Details of HVA Lanka Exports (Private) Limited Board of Directors......................................................................................................................56 Table 9-3: Directors’ Shareholdings in HVA Foods Limited as at 30th September 2010................................................................................................58 Table 9-4: Other Directorships...........................................................................................................................................................................................................................58 Table 9-5: Senior Management of HVA Foods Limited......................................................................................................................................................................61 Table 9-6: Human Resources..............................................................................................................................................................................................................................63 Table 10-1 : Stated Capital of HVA Foods Limited.................................................................................................................................................................................64 Table 10-2: Ten Largest Shareholders – Pre IPO after the Split......................................................................................................................................................64 Table 10-3: Major Shareholders of HVA Lanka Exports (Private) Limited................................................................................................................................65 Table 10-4: Post IPO Shareholding Structure............................................................................................................................................................................................65 Table 11-1 : HVA Foods Limited – Summarized Income Statements........................................................................................................................................67 Table 11-2 : HVA Foods Limited – Summarized Balance Sheets..................................................................................................................................................67 Table 11-3: HVA Foods Limited – Summarized Interim Income Statement.........................................................................................................................67 Table 11-4: HVA Foods Limited – Summarized Interim Balance Sheet....................................................................................................................................68

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ANNEXURE B – INDEX ON CHARTS AND FIGURES ILLUSTRATED IN THE PROSPECTUS List of Charts Chart 4-1: Break up of Total Revenue based on Product Category ..........................................................................................................................................30 Chart 4-2: Break up of Total Revenue based on Geographical Market.....................................................................................................................................31 Chart 4-3: Export Market Concentration based on Export Quantity.........................................................................................................................................32 Chart 4-4: Historical Volume Movement - CIS and Russia................................................................................................................................................................33 Chart 4-5: Historical Volume Movement - Far Eastern Region......................................................................................................................................................34 Chart 4-6: Historical Volume Movement - Europe & Americas.....................................................................................................................................................37 Chart 4:7- Break up of Sales based on Product Line............................................................................................................................................................................39 Chart 5-1: Major Sources of Foreign Exchange Earnings..................................................................................................................................................................43 Chart 5-2: Tea Production in Sri Lanka for the Past Decade............................................................................................................................................................44 Chart 5-3: Auction Price per kg.........................................................................................................................................................................................................................46 Chart 5-4: January-July 2009 Vs 2010 Tea Packet Imports................................................................................................................................................................48 Chart 6-1: Per Capita GDP at market prices (USD)................................................................................................................................................................................50 Chart 6-2: GDP (percent change)....................................................................................................................................................................................................................50 Chart 6-3: Share of Trade......................................................................................................................................................................................................................................50 Chart 11-1: Revenue Movement......................................................................................................................................................................................................................68 Chart 11-2: Gross Profit Movement................................................................................................................................................................................................................69 Chart 11-3: Operating Profit Movement.....................................................................................................................................................................................................69 Chart 11-4: Net Profit Movement....................................................................................................................................................................................................................69 Chart 11-5: Monthly Revenue..........................................................................................................................................................................................................................70 Chart 11-6: Profit Before Taxation....................................................................................................................................................................................................................70

List of Figures Figure 4-1: Group Structure.................................................................................................................................................................................................................................23 Figure 4-2: Market Concentration...................................................................................................................................................................................................................31 Figure 5-1: Production Process – Black Tea................................................................................................................................................................................................45 Figure 5-2: Production Process – Value Added Tea...............................................................................................................................................................................47

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ANNEXURE C – COLLECTION POINTS Copies of the Prospectus and the Application Form can be obtained free of charge from the following collection points.

Manager to the Issue Acuity Partners (Private) Limited 53, Dharmapala Mawatha, Colombo 03 T: 2206206

Members & Trading Members of the CSE Acuity Stockbrokers (Private) Limited 53, Dharmapala Mawatha, Colombo 03 T: 2206206

Asha Phillips Securities Limited Level 4, “Millennium House”, 46/58, Navam Mawatha, Colombo 02 T: 2429100

Asia Securities (Private) Limited Level 21, West Tower, World Trade Centre, Echelon Square, Colombo 01, Tel. 2423905, 5320000

Amana Securities Limited 532/4F, Srikotha Lane, Galle Road, Colombo 03. T: 2372561-4

Assetline Securities (Pvt) Ltd. No. 282, Kaduwela Road Battaramulla T: 4700111,2307366

Bartleet Mallory Stockbrokers (Private) Limited Level G, “Bartleet House” 65, Braybrooke Place, Colombo 02 T: 5220200

Capital Trust Securities (Private) Limited 42, Mohamed Macan Markar Mawatha, Colombo 03 T: 5335225

Ceylinco Stockbrokers (Private) Limited Level 9, “Ceylinco House”, 69, Janadipathi Mawatha, Colombo 01 T: 4714300, 4714388-9, 077-891871

CT Smith Stockbrokers (Private) Limited 4-14, Majestic City, 10, Station Road, Colombo 04 T: 2552290-4

Capital Alliance Securities (private) Limited Level 5, “Millenium House”, 46/58, Navam Mawatha, Colombo 02 T: 2317777

DG Global Securities (Private) Limited 1st Floor, “Sayuru Sevana”, 46/12, Navam Mawatha, Colombo 02 T: 4700111, 2307366

D N H Financial (Pvt) Ltd. Level 16, West Tower, World Trade Center Colombo 01 T: 5732222

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First Guardian Equities (Private) Limited 32nd Floor, East Tower, World Trade Centre, Echelon Square, Colombo 01 T: 5884400

Heraymila Securities Ltd. No. 532/4 F, Srikotha Lane Galle Road Colombo 03 T: 2372561-4

IIFL Securities Ceylon (Pvt) Ltd. 27th Floor, East Tower, World Trade Center Colombo 01 T: 2333000

J B Securities (Pvt) Ltd. 150, St. Joseph Street Colombo 14 T: 2490900, 077-2490900

John Keells Stockbrokers (Private) Limited 130, Glennie Street, Colombo 02 T: 2326003, 2338066/7, 2446694/5, 2439047/8

Lanka Securities (Private) Limited 228/2, Galle Road, Colombo 04, T: 4706757, 2554942

NDB Stockbrokers (Pvt) Ltd. 5th Floor, NDB Building 40, Navam Mawatha Colombo 02 T: 2314170-8

SC Securities (Private) Limited 2nd Floor, 55, D. R. Wijewardena Mawatha, Colombo 10 T: 4711000

SMB Securities (Private) Limited Landmark Building, 385 Galle Road, Colombo 03 T: 5539593

SKM Lanka Holdings (Private) Limited 377/3, Galle Road, Colombo 03 T: 2372413-4

Somerville Stockbrokers (Private) Limited 137, Vauxhall Street, Colombo 02 T: 2329201-5, 2332827, 2338292-3

Tabrobane Securities (Private) Limited 10, Gothami Road, Colombo 10 T: 5328100

TKS Securities (Private) Limited 14, Reid Avenue, Colombo 07 T: 2675200

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Bankers to the Offering DFCC Vardhana Bank Branches Ambalangoda Ampara Branch Anuradhapura Avissawella Badulla Bandarawela Batticaloa Borella Chillaw City Office Colombo Office Dambulla Deniyaya Galle Gampaha Gampola Gangodawila Horana Jaffna Branch Kadawatha Kaduruwela Kalawana Kaluthara Kandy Katugasthota Kiribathgoda Kotahena Kottawa Kuliyapitiya Kurunegala Maharagama Malabe Matale Matara Moratuwa Nawala Negambo Nugegoda Nuwara Eliya Panadura Peradeniya Pillyandala Rathnapura Trincomalee Wattala Wellawatta

132

26B, Galle Road, Ambalangoda 3, D S Senanayake Road, Ampara 249, Maithreepala Senanayake Mw, A’pura 27/29 Yatiyanthota Rd, Avissawella 14, Udayaraja Mw, Badulla 126, Main Street, Bandarawela 105, Trinco Road, Batticaloa 14, Cotta Road, Colombo 08 44, Kurunegala Rd, Chillaw 73/5, Galle Road, Colombo 3 73, W A D Ramanayake Mawath, Colombo 2 632, Anuradapura Rd, Dambulla 04, Pallegama Rd, Deniyaya 93, Wakwella Rd, Galle 123, Baudhaloka Mw, Gampaha 73, Nuwaraeliya Rd, Gampola 601/1, High Level Rd, Gangodawila 49 Panadura Rd, Horana 141, K K S Road, Jaffna 341, Kandy Road, Kadawatha 626, Main Street, Kaduruwela 70, Mathugama Road, Kalawana 270, Main Street, Kaluthara 5, Dewa Veediya, Kandy 202/3, Kandy road, Katugasthota 60, Kandy Road, Kiribathgoda 214, Bandaranayake Mw. Colombo 13 29, High Level Road, Kotta 139, Madampe Rd, Kuliyapitiya 25, Rajapihilla Rd, Kurunegala 135, High Level Road, Maharagama 9, Athurugiriya Rd, Malabe 129, Main Street, Matale 5, Hakmana Road, Matara 129 A, Galle Road, Moratuwa 540, Nawala Road, Rajagiriya 389/A, Main Street, Negombo 24, Nawala Road, Nugegoda 58A,60 Park Road, Nuwara-eliya 114/A, Janapriya Mw, Panadura 901/A, Peradeniya Rd, Kandy 1, Old Road, Piliyandala 46, Bandaranayake Mw, Rathnapura 246, Ehamparam Road, Trincomalee 424, Negombo Road, Wattala 02, 33rd Lane, Wellawatta

| HVA Foods Limited – Initial Public Offering

091 2255965 063 2223442 025 2223417/8 036 2233900-1 055 2230160/2 057 2224849 065 2228222 011 2690069 032 2220236/7 011 2442244 011 2371371 066 2283553/4 041 2273073/4 091 222737/76 033 2226104 081 2350876 011 2442711 034 2265331/2 021 2221444 011 2922340/1 027 2225859 045 2255411/2 034 2225560 081 2234411 081-2213465/6 011 2910965 011 2438500/1 011 2783886/7 037 2284564/5 037 2224142 011 2838668 011 2442713/4 066 2234332/4 041 2225500/2 011 2642336 011 2880880 031 2227555/6 011 2814038/9 052 2223568/9 038 2241630/1 081 2387673 011 2609700/2 045 2223667/8 026 2225550 011 2949148/9 011 2362741

ANNEXURE D – ‘HELADIV’ BRAND EQUITY The ‘HELADIV’ trademark is owned and registered under HVA Foods (Private) Limited and for commercial purposes is employed by the HVA Group. This trademark has enabled consumers with a means of identifying and distinguishing the ‘HELADIV’ brand of products produced by HVA Group against the goods supplied by any other entity. Based on the assessment carried out by PwC Sri Lanka, the value of the ‘HELADIV’ brand as at 31st December 2009 has been estimated at USD 1.08 million to USD 1.24 million (with a mid-point value of USD 1.16 million). At a US dollar to Sri Lankan rupee exchange rate of USD 1 : LKR 114 this implies a value range in the order of LKR 124.0 million to LKR 141.6 million (with a mid-point of SLR 132.8 million). This brand value has been assessed employing the relief from royalty approach, a generally accepted valuation approach where value attributed to an intangible asset is estimated based on the notional royalty expense savings from ownership of the brand vis-à-vis royalties or franchise fees payable on an arm’s length basis to a third party in return for the right of use of such brand. ‘HELADIV’ brand value has been estimated based on the five-year forecast sales amounts provided by management, estimated royalty rate applicable to the associated brand sales generated and computation of notional post-tax royalty streams, net of any associated marketing expenses generated thereafter. These post-tax royalty streams have been discounted at the company’s post-tax weighted average cost of capital in order to arrive at the assessed brand value. Further, different market segments catered to by the ‘HELADIV’ brand have been reviewed in order to assess the brand proposition within the respective market segments. Both publicly available and PwC Sri Lanka proprietary information on royalty rates and franchise agreements have been reviewed to carry out an overall assessment of the economic benefits generated by HVA Foods (Private) Limited.

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ANNEXURE E – CUSTODIAN BANKS Bank of Ceylon Head Office, 11th Floor, 04, Bank of Ceylon Mawatha, Colombo 01 T: 2448348, 2338742/55, 2544333

Banque Indosuez C/O Hatton National Bank Limited, Cinnamon Garden Branch, 251, Dharmapala Mawatha, Colombo 07 T: 2686537, 2689176

Citi Bank 65 C, Dharmapala Mawatha, P.O. Box 888, Colombo 07 T: 2447316/8, 2447318, 2449061, 2328526, 4794700

Commercial Bank of Ceylon Limited Commercial House, 21, Bristol Street, P.O. Box 853, Colombo 01 T: 2445010-15, 238193-5, 430420, 336700

Deutsche Bank P.O. Box 314, No. 86, Galle Road, Colombo 03 T: 2447062, 2438057

Hatton National Bank Limited HNB Towers, 479, T.B. Jayah Mawatha, T: 2664664

The Hong Kong and Shanghai Banking Corporation Limited 24, Sir Baron Jayathilake Mawatha, Colombo 01 T: 2325435, 2446591, 2446303, 2346422 People’s Bank Head Office, 5th Floor, Sir Chittampalam A Gardiner Mawatha, Colombo 02 T: 2781481, 237841-9, 2446316-15, 2430561

Standard Chartered Bank 37, York Street, P. O. Box 112, Colombo 01 T: 4794400, 2480000

Sampath Bank Limited 110, Sir James Peiris Mawatha, Colombo 02 T: 5331441

State Bank of India 16, Sir Baron Jayathilake Mawatha, Colombo 01 T: 2326133-5, 2439405-6, 2447166, 2472097

Seylan Bank Limited Level 8, Ceylinco Seylan Towers, 90, Galle Road, Colombo 03 T: 2456789, 4-701812, 4-701819, 4-701829

Union Bank of Colombo Limited 15A, Alfred Place, Colombo 03 T: 2370870

Nations Trust Bank Limited 256, Sri Ramanathan Mawatha, Colombo 15 T: 4313131

National Savings Bank 255, Galle Road, Colombo 03 T: 2573008-15

Pan Asia Banking Corporation PLC Head Officer, 450, Galle Road, Colombo 03 T: 2565565

Public Bank Berhad No: 340, R A De Mel Mawatha, Colombo 03 T: 2576289, 7290200-07

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PROSPECTUS HVA FOODS LIMITED INITIAL PUBLIC OFFERING To be listed on the Diri Savi Board of the Colombo Stock Exchange

HELADIV TEAS. GIVING THE WORLD A TASTE OF SRI LANKA.

WWW.HELADIV.COM

For further inquiries please contact the Managers to the Offering

I N S P I R E D

B Y

I N N O V A T I O N