Annual Report 2011 - Colombo Stock Exchange

VISIONTo be the most respected Chemical Company in South Asia.MISSIONWe are the most customer focused, quality conscious, preferred supplier ofindustrial chemicals in our key markets. Our people are innovative,empowered, put safety first & act as company owners.VALUESSafety and environment excellenceCustomer focusTechnology leadershipPeople excellenceSimplicity & focus

UNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R TCONTENTS PageCorporate Information 1Notice of Meeting 2Chairman's Message 3Review of Operations 4Board of Directors 5 -6Statement of Directors’ Responsibilities 7Report of the Directors 8 - 11Corporate Governance 12-15Report of the Board Audit Committee 16-17Report of the Remuneration Committee 18Managing Director’s and Chief Financial Officer'sResponsibility Statement19Report of the Independent Auditors 20Income Statement 21Statement of Changes in Equity 21Balance Sheet 22Cash Flow Statement 23Significant Accounting Policies 24 -31Notes to the Financial Statements 32 -39Information to Shareholders 40 - 42Ten Year Summary 43Glossary of Financial Terms 44Environment ManagementForm of Proxy45Enclosed

CORPORATE INFORMATIONUNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R TNAME OF THE COMPANYUnion Chemicals Lanka PLCCOMPANY REGISTRATION NO PQ 140LEGAL STATUSBOARD OF DIRECTORSAUDIT COMMITTEEREMUNERATION COMMITTEESECRETARIES & REGISTRARSA Public Quoted Company with limited Liability, incorporatedin Sri Lanka in 1988. The Ordinary Shares of the Company arelisted in the Colombo Stock Exchange.Dr. P M Gunasekera - ChairmanMr. H A D U G Gunasekera - Managing DirectorMr. A N U JayawardenaMr. G R PathmarajMr. T N JayasingheProf. R M S W RanasingheMr. R De ZilwaMr. G W HewawithanaMr. T N Jayasinghe - ChairmanProf. R M S W RanasingheMr. R De ZilwaProf. R M S W Ranasinghe - ChairmanMr. T N JayasingheMr. R De ZilwaMessrs Jacey & Company9/5, Thambiah Avenue, Colombo 07.AUDITORS Messrs KPMGChartered Accountants32A, Sir Mohamed Macan Markar Mawatha, Colombo 03.LAWYERSBANKERSMessrs. Julius & Creasy41, Janadhipathi Mawatha, P O Box 154, Colombo 01.Commercial Bank of Ceylon PLCP O Box 148, Bristol Street, Colombo 01.National Development Bank PLC103 1/A, Dharmapala Mawatha, Colombo 07.Nation Trust Bank PLC242, Union Place, Colombo 02.Peoples Bank50, Hyde Park Corner, Colombo 02.REGISTERED OFFICE 9/5, Thambiah Avenue, Colombo 07.FACTORYMaithri Mawatha, Ekala, Ja-ela.1

UNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R TNOTICE OF MEETINGNOTICE IS HEREBY GIVEN THAT the Twenty Fourth Annual General Meeting of Union Chemicals Lanka PLCwill be held at Ceylon Chamber of Commerce, Ground Floor, West Wing Conference Room at No.50, NavamstMawatha, Colombo 02, on 31 May 2012 at 10.00 a.m for the following purposes :th1. To receive and consider the Audited Financial Statements for the year ended 25 December, 2011together with the Reports of the Auditors' thereon and the Annual Report for the said year.2. To declare a Final Dividend of Rs. 5.00 per Sharethfor the year ended 25 December, 2011 asrecommended by the Directors.3. (i)stTo re-appoint as a Director Mr. Ainsley Nimal Ubesinghe Jayawardene who was 75 years on 01November, 2011 and who vacates his office in terms of Section 210 of the Companies Act No. 7of 2007 (the Act).Notice is hereby given to propose the undernoted Ordinary Resolution in compliance withSection 211 of the Act, in relation to his re-appointment.“RESOLVED THAT Mr. Ainsley Nimal Ubesinghe Jayawardene who is 75 years of age be and ishereby re-appointed a Director of the Company and it is hereby declared that the age limit of70 years referred to in Section 210 of the Companies Act No. 7 of 2007 shall not apply to the saidMr. Ainsley Nimal Ubesinghe Jayawardene”.(ii)(iii)To re-elect Mr Russel De Zilwa Director, who retires by rotation in terms of Article 84 of theArticles of Association of the Company.To re-elect Mr. Gothama Waruna Hewawithana, Director, who retires by rotation in terms ofArticle 84 of the Articles of Association of the Company.4. To re-appoint the retiring Auditors Messrs KPMG, Chartered Accountants, to hold office until theconclusion of the next Annual General Meeting and to authorise the Directors to determine theirremuneration.BY ORDER OF THE BOARDJACEY & COMPANYSECRETARIESColomboth25 April 2012.NOTE:1. A MEMBER ENTITLED TO ATTEND AND VOTE AT THE MEETING IS ENTITLED TO APPOINT APROXY TO ATTEND AND VOTE IN HIS/HER STEAD.2. A PROXY NEED NOT BE A MEMBER OF THE COMPANY3. THE COMPLETED FORM OF PROXY MUST BE DEPOSITED AT THE COMPANY SECRETARIESOFFICE AT NO.9/5, THAMBIAH AVENUE, COLOMBO 07 NOT LESS THAN 48 HOURS BEFORE THETIME FIXED FOR THE MEETING.2

UNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R TCHAIRMAN’S MESSAGEthOn behalf of the Board of Directors, I welcome you to the 24 Annual General Meeting of the Company andsubmit you the Annual Report together with the audited Statement of Accounts of the Company for thethfinancial year ended 25 December 2011.The EconomyThe economy grew by 8.3 percent in 2011, the highest in Sri Lanka's post independence history, sustaining agrowth momentum of 8 percent over two consecutive years. The Industry and Service sectors were the driversof high growth momentum in 2011.Industry sector remained resilient in a challenging environment recordingimpressive growth of 10.3 percent in 2011.Inflation remained at single digit levels for the third consecutive yearsupported by improved domestic supply conditions and prudent liquidity management by the Central Bank.PerformanceThe performance of the Company is analyzed in detail in the Review of Operations in page 04. The revenue ofthe Company for the year was Rs.659.13 mn, a growth of 11% over the last year's performance. Wecommercialized new solutions that anticipate and address needs of our customers to enhance our growth inearnings. The profit after tax for the period is Rs.57.08 mn in comparison to Rs. 54.25 in the previous year. Wedelivered these results in the midst of an often unpredictable economic environment, which is validation of theresilience of our Company.Future OutlookThe global economic outlook for 2012 is mixed, while downside risks to global economic recovery continue topersist. The Sri Lankan economy is projected to grow at a slower rate of 7.2 percent in 2012.Our priorities remainclear for 2012 and beyond. Our R& D pipeline is stronger than ever before, and more importantly, ourinnovations are delivering real value to the bottom line today. Our investments in R&D continue to add newproducts for the paints and adhesives industries and new specialty chemicals will be introduced in to themarket through new trading partners. We have strengthened our balance sheet and continue to driveefficiencies throughout the Company, which gives us greater flexibility to execute on our strategy.DividendsThe Board of Directors declared Rs.6.00 per share as interim dividend in December 2011. We now recommendthe payment of final dividend of Rs.5.00 per share.AcknowledgmentI wish to thank my colleagues on the Board of Directors for their valuable advice and support during the year.My thanks to the management team and employees for high levels of commitment and dynamism they havemade to the continued good performance of the Company during the year 2011. I also appreciates theassistance extended by Dow Chemical Company and other suppliers, Government Institutes and Banks. FinallyI take this opportunity to express our appreciation to our valued business partners and stockholders for yourinvestment and your confidence in our future.Dr. P.M. GunasekeraChairmanth25 April 2012.3

REVIEW OF OPERATIONSSUMMARY OF RESULTSUNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R T2011 2010 %Rs'000 Rs'000 GrowthRevenue 659,133 593,886 11Cost of sales 517,909 458,381 13Gross profit 141,224 135,505 4Profit before tax 85,460 84,869 1Profit after tax 57,075 54,256 5Gross dividends 16,500 16,500 -Shareholders funds 261,943 222,868 18The revenue of the Company increased by 11% to Rs. 659.13 from Rs. 593.89. The revenue from latex segmentincreased by 16% and that of Chemicals & Plastic decreased by 2% during the year under review. The demandfor paints recorded a marginal increase amidst increasing competition with equivalent products. Thevolumes of adhesive range increased with the introduction of new products in to the market. The Companyexpects to introduce new water based products in the areas of wood care and construction in the comingyear subsequent to the sucessfull launched of wood coating products in to the market.The performance of Chemicals & Plastic segment recorded a marginal decrease as the revenue from productsin the solvents range shifted to the indent basis. However, the Company introduces new products in to thecommodity and resins range and expanded the product portfolio during the year under review.The gross profit for the period is Rs.141.22 mn against Rs. 135.51mn in 2010. The growth in revenue offset byincreased in cost of sales due to the escalation of cost of raw materials during the year which resulted indecrease in gross margin marginally.The profit before tax increased to Rs.85.46mn from Rs.84.87mn due to increase in other operating income. Theother operating income for the period is Rs.5.7mn on account of gain on disposal of property, plant &equipment. The administrative expenses increased on account of staff related costs and rent on head officepremises.The total investment on account of property, plant & equipment was Rs.30.73 mn in 2011 the details of whichare shown in note 11 to the Financial Statements.4

UNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R TBOARD OF DIRECTORSDr. P.M. Gunasekera - ChairmanthAppointed to the Board of Directors as Chairman on 18 November 2003 .He holds a Ph.D in BusinessAdministration, Postgraduate Institute of Management, University of Sri Jayewardenepura, and is a Graduatein Bachelor of Science, Civil Engineering Degree from University of Ceylon, MSc. in Construction Managementfrom Loughborough University of Technology, U.K., a Fellow of the Institution of Engineers, Sri Lanka and aFellow of the Institution of Civil Engineers U.K., a Fellow of the National Academy of Sciences of Sri Lanka, PastPresident, Federation of Engineering Institutions of South and Central Asia, Past President The Institution ofEngineers, Sri Lanka. He is the Managing Director of LAN Management Development Service and the Chairmanof Technical & Trading Services (Pvt) Ltd. He has extensive experience in Project and Construction Managementboth locally and overseas.H.A.D.U.G. Gunasekera - Managing DirectorstAppointed as the Managing Director on 01 April 2000. Holds a Master of Business Administration,Postgraduate Institute of Management, University of Sri Jayewardenepura. He is an Attorney-at-Law, holdsLL.B (OUSL), LL.M(Col), a Fellow of Incorporated Engineers, Sri Lanka and a Fellow of Institute of ManagementServices (U.K). He serves a s Chairman - Chemical Sector and Vice Chairman of Ceylon National Chamber ofIndustries and a Board Member of the National Engineering, Research and Development Board (NERD).A.N.U. JayewardenathAppointed to the Board on 18 March 1988.He is MA, LL.B (Cantab.), Barrister of Law of Lincolns Inn, Attorney -at-Law of Supreme Court of Sri Lanka. Founder Director of Mercantile Shipping PLC and presently functioning asits Chairman, Director of International Construction Ltd.G.R. PathmarajthJoined the Board on 18 March 1988.He is a Graduate of Bachelor of Commerce, holds Master of BusinessAdministration and a member of the British Institute of Management. Presently Managing Director of K.G.Investments Ltd, Cinemas Ltd, Cinemas Entertainment Ltd, and a Director of Energizer Ltd.Prof. R.M.S.W. RanasinghethJoined the Board on 26 March 2008. He holds a PhD in Public Administration, Postgraduate Institute ofManagement, University of Sri Jayewardenepura and Master of Public Administration,University of SriJayewardenepura. He has contributed widely to the development of Human Resource Management Policiesand practices in Sri Lanka. He currently serves as a Professor of Management Studies at Open University of SriLanka and a member of the Board of Study in Public Administration, University of Sri Jayewardenepura.T.N. JayasinghethJoined the Board on 26 March 2008. A Fellow of the Chartered Institute of Management Accountants, U.K. Hehas held many senior Financial and Management positions in Multinational Companies in the United Kingdomand Middle East. Presently serves as a Director of Mercantile Shipping Company PLC, Managing Director ofPremier Management Ltd. and Deputy Chairman of several Companies in the Allied Investments Ltd. Group.5

BOARD OF DIRECTORS (Contd.)R.De ZilwathAppointed to the Board on 26 March 2008. He holds Mechanical Engineering Degree from the University ofCeylon, a Fellow of the Institution of Engineers, Sri Lanka and a Fellow of the Institution of MechanicalEngineers, UK. He has extensively involved in the research, design and development of Industrial processingequipment in Sri Lanka and overseas. He has functioned as consultant to industrial projects in Peru andUganda. He has been a consultant to World Bank and Ministry of Vocational & Training and currently is theGeneral Manager of the Engineering Consultants (Pvt) Ltd.G.W. HewawithanaUNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R TthAppointed to the Board 18 November 2003. He is an Associate of the Institute of Chartered Accountants of SriLanka and a Fellow of the Chartered Institute of Management Accountants, U.K.6

STATEMENT OF DIRECTORS' RESPONSIBILITIESDirectors' Responsibilities for the Preparation of Financial StatementsThis Statement of Directors' Responsibilities is to be read in conjunctions with the Auditors' Report and is madeto distinguish the respective responsibilities of the Directors and of the Auditors in relation to the FinancialStatements contained in this Annual Report.The Directors of your Company are required by the Companies Act No.7 of 2007 to prepare FinancialStatements which give a true and fair view of the state of affairs of the Company as at the end of the FinancialYear, and of the Profit and Loss and of the Cash flows of the Company for the Financial Year.thThe Directors confirm that the Financial Statements of the Company for the Year ended 25 December, 2011presented in the Report have been prepared in accordance with the Sri Lanka Accounting Standards and theCompanies Act No.7 of 2007. In preparing the Financial Statements, the Directors have selected theappropriate accounting policies and have applied them consistently. Reasonable and prudent judgments andestimates have been made and applicable accounting standards have been followed and the FinancialStatements have been prepared on a going concern basis.The Directors are of the view that adequate funds and other resources are available within the Company for theCompany to continue in operation for the foreseeable future.The Directors have taken all reasonable steps expected of them to safeguard the assets of the Company and toestablish appropriate systems of internal controls in order to prevent, deter and detect any fraud,misappropriation or other irregularities.The Directors have also taken all reasonable steps to ensure that the Company maintain adequate and accurateaccounting books of record which reflect the transparency of transactions and provide an accurate disclosureof the Company's financial position.As required by Section 56(2) of the Companies Act No.7 of 2007, the Board of Directors have confirmed that theCompany, based on the information available, satisfied the Solvency Test, immediately after the distribution, inaccordance with Section 57 of the Companies Act No.7 of 2007, and have obtained a certificate from thethAuditors when declaring the Interim Dividend paid on 19 December, 2011. The prescribed provisions will befollowed and a further Certificate will be obtained from the Auditors, prior to recommending the FinalDividend of Rs.5.00per share for the Financial Year, which is to be declared by the Shareholders at the AnnualGeneral Meeting.The Directors are required to provide the Auditors with every opportunity to take whatever steps andundertake whatever inspection they consider appropriate for the purpose of enabling them to give their AuditReport. The Directors are of the view that they have discharged their responsibilities in this regard.Compliance ReportThe Directors confirm that, to the best of their knowledge, all taxes and levies payable by the Company and allcontributions, levies and taxes payable on behalf of the employees of the Company, and all other knownstatutory obligations as at the balance sheet date have been paid or provided for in the Financial Statements.By Order of the BoardJACEY & COMPANYSecretariesColomboth25 April 2012UNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R T7

REPORT OF THE DIRECTORSUNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R TThe Board of Directors of Union Chemicals Lanka PLC is pleased to present the Annual Report together with thethAudited Financial Statements of the Company for the year ended 25 December, 2011.Principle ActivitiesManufacturing and marketing of a wide range of polyvinyl/acrylic emulsions for the paint and textile industriesin Sri Lanka and for industrial and domestic use as adhesives. The Company also indents, imports and markets adiverse range of production such as specialty solvents, polyolefins, coating resins, surfactants, personal careproducts etc., which are manufactured by the Dow Chemicals Company, USA and its affiliates worldwide.Changes to the nature of BusinessThere was no significant changes to the principle activities of the Company during the financial year ended 25December, 2011.thReview of OperationthA review of the operations of the Company during the financial year ended 25 December, 2011 is described inthe Chairman's Message on page 03 and in the Review of Operations on page 04.Financial StatementsthThe Financial Statements for the Year ended 25 December, 2011 are set out on pages 21 to 39 of the AnnualReport. The Turnover of the Company during the year was Rs 659.13Mn (2010–Rs 593.89 Mn). The Profit beforeTaxation amounted to Rs. 85.46 Mn (2010–Rs 84.87 Mn)Auditors' ReportThe Auditors' Report which is an integral part of the Financial Statements prepared for the financial year endedth25 December, 2011 is set out on page 20 of the Annual Report.Director's Responsibility for the Financial StatementsThe Directors are responsible for preparing and presenting the Financial Statements, as set-out on page 07.The Financial Statements have been prepared in conformity with the Sri Lanka Accounting Standards as laiddown by the Institute of Chartered Accountants of Sri Lanka, Companies Act No.7 of 2007 and the Listing Rulesof the Colombo Stock Exchange.The Directors are satisfied that the Financial Statements, presented on pages 21 to 23 inclusive, give a true andfair view of the state of affairs of the Company as well as the profit for the year then ended.Accounting PoliciesDetails of the Accounting Policies are set out in pages 24 to 31 of the Annual Report. There have been nochanges to the Accounting Policies adopted by the Company during the year under review. The Directorsconsider that, in preparing these Financial Statements, suitable accounting policies have been used which areapplied consistently and supported by reasonable and prudent judgment and that all applicable accountingstandards have been followed.Corporate GovernanceA description of the Company's Corporate Governance practices is set out on pages 12 to 15.Going ConcernThe Board of Directors is satisfied that the Company has adequate resources to continue its operation in theforeseeable future. Accordingly, the Financial Statements are prepared based on the “Going Concern Concept”.8

REPORT OF THE DIRECTORS (Contd.)DirectorateThe Board of Directors of the Company as at date is set out on page number 01 titled “Corporate Information”.There were no changes in the Directorate during the year under review. The Directors of the Company who heldoffice during the year under review and as at the end thereof are set out below:- Dr.P M Gunasekera- Mr. H A D U G Gunasekera- Mr. A N U Jaywardena- Mr. G R Pathmaraj- Mr. G W Hewawithana- Mr. T N Jayasinghe- Prof. R M S W Ranasinghe- Mr. R de ZilwaUNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R TMr. Ainsley Nimal Ubesinghe Jayawardene who is 75 years of age vacates his office in terms of the provisions ofSection 210 of the Companies Act No.7 of 2007.Notice is given by the Company to its shareholders of the intention to move an Ordinary Resolution for the reappointmentof Mr. A N U Jayawardene as a Director of the Company, in terms of the provisions of Section 211 ofthe Companies Act No. 7 of 2007 and is referred to in the Notice convening the Annual General Meeting for theyear 2012.In terms of Article 84 of the Articles of Association of the Company Mr Russel De Zilwa, Director, retires byrotation and being eligible is recommended by the Board of Directors for re-election by the Members at theAnnual General Meeting for the year 2012.In terms of Article 84 of the Articles of Association of the Company Mr. Gothama Waruna Hewawithana,Director, retires by rotation and being eligible is recommended by the Board of Directors for re-election by theMembers at the Annual General Meeting for the year 2012.Board Sub - CommitteesThe following Board Sub-Committees have been established by the Company:Audit CommitteeMr. T N JayasingheMr. R. De ZilwaProf. R M S W RanasingheRemuneration Committees:Prof. R M S W RanasingheMr. R. De ZilwaMr. T N Jayasinghe- Chairman- Chairman9

REPORT OF THE DIRECTORS (Contd.)UNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R TThe Reports of the Board, Audit and Remuneration Committees are set out on pages 16 and 18 respectively andform an integral part of the Annual Report of the Board.The Composition of the above Board Sub-Committees, number of Meetings held and their functions andresponsibilities are set out in the Corporate Governance Report appearing on pages 12 to 15 of this AnnualReport.The Directors' Interest in ContractsThe Company maintains an Interest Register in compliance with the requirements of the Companies Act No. 7of 2007.Directors' Interest in Contracts are disclosed under related party transactions in Note 25 to the FinancialStatements.Directors' ShareholdingShareholdings of the Directors of the Company are as follows. The Articles of Association of the Company donot stipulate a share qualification for Directors.Name of the Directors 25.12.2011 25.12.2010Dr. P.M. Gunesekera - -H A D U G Gunesekera 54,200 54,100First Capital Markets/H A D U G Gunesekera 734,500 734,500A N U Jayawardena - -G R Pathmaraj 9,687 9,687T N Jayasinghe - -Prof. R M S W Ranasinghe - -R D Zilwa - -G W Hewawithana - -Directors' Fees and emolumentsthDirectors' fees and emoluments paid for the financial year ended 25 December, 2011 amounted to Rs. 10.71Mn (2010 – Rs 8.72 Mn).DonationsDonations made by the Company during the year under review amounted Rs. 0.013Mn (2010-Nil)Property, Plant & EquipmentDetails of the movement in the Property, Plant and Equipment of the Company are given in Note 11 to theFinancial Statements.Stated CapitalThere was no change in the Stated Capital of the Company during the year under review. The Company's StatedthCapital as at 25 December, 2011 was Rs 15,000,000/- comprising of 1,500,000 Ordinary Shares.10

REPORT OF THE DIRECTORS (Contd.)ShareholdersthThe total shareholder base of the Company as at 25 December, 2011 was 744 (2010 - 649). The 20 MajorShareholders of the Company are given under Information to Shareholders on page 40.DividendUNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R TthA Final Dividend of Rs. 6.00 per Share for the year ended 25 December, 2010 has been paid to the Shareholdersththof the Company on 14 June, 2011. A first Interim Dividend of Rs. 6.00 per Share for the Financial Year ended 25thDecember, 2011 has been paid to the Shareholders of the Company on 19 December, 2011.The Directors have recommended the payment of a Final dividend of Rs.5.00 per share for the financial yearthended 25 December, 2011.The Directors have taken appropriate measures to obtain a Report in terms of Section 56 (2) of the CompaniesAct No.7 of 2007 from the Company's Auditors confirming that the Company will, immediately after thepayment of the Dividend satisfy the solvency test in connection with the above dividend declaration.Statutory PaymentsThe Directors to the best of their knowledge and belief are satisfied that all statutory payments in relation to theGovernment and the Employees had been made to date.Events Occuring After the Balance Sheet DateAll material post Balance Sheet events have been considered and where appropriate adjustments or discloureshave been made in respective notes to the Financial Statements.AuditorsThe Financial Statements for the period under review have been audited by Messrs KPMG,CharteredthAccountants. Rs.0.425 Mn is payable by the Company as Audit Fees for the year ended 25 December, 2011.Messrs KPMG have expressed their willingness to continue in office and a Resolution to re-appoint them and toauthorise the Directors to determine their remuneration will be proposed at the Annual General Meeting.Auditors' Relationship with the CompanyThe Company did not have any relationship with, the Auditors of the Company, other than that of the Auditor,thduring the Financial Year ended 25 December, 2011.By Order Of the BoardDr. P.M. Gunesekera A N U Jayawardena SecretaryDirector Director JACEY & COMPANYSecretariesth25 April 201211

CORPORATE GOVERNANCEUNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R TThe fundamental concern of Corporate Governance is to ensure that the Company's directors and managersact in the best interest of the Company and its various stakeholders. Whilst good Corporate Governance helpsimprove public understanding of the activities of the Company, it is also a powerful tool for protectinginvestors. Accordingly, timely and accurate disclosure of information regarding the financial stability,performance and ownership are important aspects of Corporate Governance.The Company is committed towards its corporate values and adheres to the Code of Best Practice on CorporateGovernance. This Report sets out the Company's Corporate Governance process with reference to the extent ofcompliance with same.Board of DirectorsThe Board of Directors collectively possesses a range of skills and knowledge to deal with various businessissues and also have the ability to review and challenge management performance and is responsible for themanagement of the Company. The Board of Directors of the Company consists of eight members and is madeup of Executive and Non - Executive Directors to maintain the independence of the Board.Regular Board Meetings allow potential problems to be identified, discussed and avoided for which purposethe Board meets once in every three months and additionally as the need arises to discuss any prevailing issues,to take appropriate action in achieving results and to review the financial performance of the Company.Decisions in relation to Capital Expenditure and Investments also require the approval of the Board.Recommending of Final Dividends and the payment of Interim Dividends are considered and recommendedby the Board of Directors.A Statement of Directors' Responsibilities for the preparation of Financial Statements is set out on page 07 ofthis Report.Board meets once in every three months to take decisions effectively and ensure the operations of theCompany. Special Board Meetings are also held when need arises.AppointmentsAt each Annual General Meeting one third of Directors for the time being, except Chairman and the ManagingDirector retire from office. The Directors to retire at each Annual General Meeting shall be those who beingsubject to retirement by rotation, have been longest in office since their last election. Retiring Directors shall beeligible for re-election.Board Sub-CommitteesThe Board Sub-Committees scrutinize and analyze the areas under their purview and ensure application ofstrict control over the affairs of the Company. The Sub-Committees make recommendations to the Board onnecessary adjustments and modifications to the internal systems of the Company. The Board has constitutedan Audit Sub-Committee and a Remuneration Sub-Committee, each of which consist of three Non-ExecutiveDirectors. Reports of the Audit Committee and the Remuneration Committee are given on the pages 16 and 18respectively of the Annual Report.12

CORPORATE GOVERNANCE (Contd.)UNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R TThe Composition of the Board and its Sub-Committees as at the end of the period under review is set out inthe table below, together with records of attendance of every Director at the respective meetings which wereheld during the year under review.Name of the Director Category Main Board AuditCommitteeRemunerationCommitteeEligibleto attendattendedEligibleto attendattendedEligibleto attendattendedDr. P M Gunesekera(Chairman)Non-Executive55Mr. H A D U G Gunesekera(Managing Director)Executive55Mr. A N U JayawardenaNon-Executive55Mr. G W HewawithanaNon-Executive55Mr. G R PathmarajNon-Executive53Mr. T N Jayasinghe(Chairman - Audit Committee)Non-executiveIndependent554411Mr. R De ZilwaNon-executiveIndependent534311Prof. R M S W Ranasinghe(Chairman – Rem. Committee)Non-executiveIndependent544311Company SecretariesJacey & Company provides Corporate Secretarial Services to the Company. The Company Secretaries play akey role in compliance matters by ensuring that the Company complies with the requirements of theCompanies Act, the Colombo Stock Exchange and other regulatory bodies. The Secretaries also ensure thatBoard procedures are followed and information is provided to shareholders on a timely basis.Compliance with Legal RequirementsAll Directors have access to the advice and services of the Company Secretaries as well as to the FinancialInformation of the Company. The Directors makes every endeavour to ensure that the Company complieswith Laws and Regulations and to exercise due diligence in managing the affairs of the Company.Additionally, checks and controls are in place to ensure that the policies of the Board are complied with.13

CORPORATE GOVERNANCE (Contd.)UNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R TCorporate Governance Report Levels of compliance as per Section 07 of the Listing Rules ofthe Colombo Stock ExchangeRule No: Subject Applicable requirement Compliance Status7.10.1Non-ExecutiveDirectorsAt least 1/3 of the total number of Directors should beNon-Executive Directors at the immediatelypreceding Annual General Meeting.CompliedMessrs P M Gunesekera, A N U Jayawardene, G RPathmaraj,T N Jayasinghe, R de Zilwa, G.W.Hewawithana and Prof. R M S Ranasinghe are the Non-Executive Directors of the Company.7.10.2IndependentDirectorsAt least 1/3 of Non - Executive Directors should beindependent. Of the Seven Non-Executive Directors,Mr. T N Jayasinghe, Mr. R de Zilwa and Prof. R M SRanasinghe are Independent Directors.CompliedEach Non-Executive Director should submit adeclaration of independence/non independence inthe prescribed formatComplied7.10.3Disclosurerelating toDirectorsNames of independent Directors should be disclosedin the Annual ReportThe Board shall make a determination annually as tothe independence or non independence of eachnon-executive Director based on the DeclarationCompliedComplied7.10.5RemunerationCommitteeA brief resume of each Director should be included inthe Annual Report and should include the Director'sareas of expertiseA listed Company shall have a RemunerationCommittee and shall comprise of Non-ExecutiveDirectors a majority of whom will be independentCompliedPlease referpages 05-06 of theAnnual ReportCompliedThe Annual Report should set out:(a) The names of the Directors comprising theRemuneration CommitteeComplied(b) The functions of the Remuneration Committee© Specified whether the Chairman of theCommittee is a Non-Executive Director(d) A statement of the Remuneration Committee(e) Aggregated remuneration paid to Executive andNon-Eexecutive DirectorsPlease referpage 18 oftheAnnual ReportPlease referpage 39 of theAnnual Report14

CORPORATE GOVERNANCE (Contd.)UNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R TRule No: Subject Applicable requirement Compliance Status7.10.6AuditCommitteeA Listed entity shall have an Audit Committeecomprising of Non-Executive Directors a majority ofwhom shall be independentCompliedA Non Executive Director shall be appointed as theChairman of the Audit CommitteeCompliedUnless otherwise determined by the Committee theChief Executive Officer and the Chief Financial Officershall attend Audit Committee MeetingsCompliedThe Chairman or one Member of the Committeeshould be a member of a recognized professionalaccounting bodyCompliedConfirmed that the functions of the AuditCommittee as being in accordance with Rule7.10.6 (b)CompliedAnnual Report should set out:a) Names of Directors comprising the AuditCommitteeCompliedb) The Committee shall make a determination ofthe independence of the Auditors and disclosethe basis for such determinationc) A Report of the Audit Committee setting outthe manner of compliance by the Company inrelation to the foregoing, during the period towhich the Annual Report relates.Please referpages 16-17of theAnnual Report15

IntroductionThis report focuses on the activities of the Audit Committee for the year under review.Composition of the Committee and MeetingsThe Audit Committee appointed by and responsible to the Board of Directors comprises three non-executiveindependent Directors. The members areMr. Tissa Jayasinghe (Chairman)Prof. Sudatta RanasingheMr. Russel De ZilwaUNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R TREPORT OF THE BOARD AUDIT COMMITTEEThe members of the Committee have the necessary financial knowledge and business acumen to carry outtheir roles effectively. Mr. Tissa Jayasinghe, the Chairman of the Audit Committee is a Fellow of the CharteredInstitute of Management Accountants of the United Kingdom. Prof. Sudatta Ranasinghe, an academic andManagement Consultant and Mr. Russel De Zilwa, a Fellow of the Institute of Engineers (S.L.) are other membersof the Committee. The Audit Committee is required to meet at least four times during the year. Attendance ofthe members at these meetings is given on page 13 of the Annual Report. The activities and views of theCommittee have been communicated to the Board of Directors at Board Meetings.Main ResponsibilitiesThe Audit Committee is empowered to examine any matters relating to the financial affairs of the Company.These include reviews of the quarterly and annual Financial Statements, review and monitor the systems ofinternal controls, presentation and compliance of Financial Statements with the Sri Lanka AccountingStandards, requirements of Colombo Stock Exchange and other regulatory bodies and such other relatedfunctions as may be directed by the Board.Financial ReportingThe Committee reviews preparation, presentation and adequacy of disclosures in the Company's quarterly andAnnual Financial Statements in compliance with statutory and other regulatory requirements, and make theirrecommendations to the Board prior to publication of these Statements. The Committee has also regularlydiscussed the operations of the Company and its future prospects with management and is satisfied that allrelevant matters have been taken in to account in the preparation of the Financial Statements.Internal AuditThe objective of the Internal Audit is to provide an independent assurance on the overall system of internalcontrols and governance, by evaluating the adequacy and effectiveness of internal controls and compliancewith laws and regulations and established policies and procedures of the Company. During the year, auditreports were received by the Committee from the Internal Auditors covering audits and investigations whichwere reviewed and discussed with management and Internal Auditors.External AuditThe External Auditors' letter of engagement, including the scope of the audit, was reviewed and discussed bythe Committee with Management and the External Auditors prior to the commencement of the Audit. Beforethe conclusion of the audit, the Committee met with the External Auditors to discuss all audit issues and agreeon their treatment. The Audit Committee is satisfied that the independence of the External Auditors has notbeen impaired by any event or service that gives rise to a conflict of interest.16

UNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R TREPORT OF THE BOARD AUDIT COMMITTEE (Contd.)The Audit Committee has recommended to the Board of Directors that Messrs. KPMG,CharteredthAccountants be re-appointed as External Auditors for the financial year ending 25 December, 2012 subjectto approval by the shareholders at the Annual General Meeting of the Company.ConclusionBased on the reports submitted by the External Auditors and the Internal Auditors of the Company and thediscussions with management, the Audit Committee is of the view that the control environment of theCompany is satisfactory and provides reasonable assurance that the financial position of the Company isadequately monitored and its assets are safeguarded.Tissa JayasingheChairman-Audit Committeeth25 April 201217

REPORT OF THE REMUNERATION COMMITTEEUNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R TThe Remuneration Committee consists of three independent, non-executive Directors. The Chairman of theRemuneration Committee is Prof. Sudatta Ranasinghe and members include Messrs. Tissa Jayasinghe andRussel de Zilwa.The Finance Manager assists the Committee by providing relevant information to facilitate thedecision making process.The Committee is responsible for determining the compensation of the Managing Director who is the onlyBoard member serving in an executive capacity. The Remuneration Policy of the Company with regard to thecompensation package of the Managing Director is linked to the commitment, expertise and achievements,identifying future activities for the growth of the Company and contribution towards the Company'sprofitability and returns to the stakeholders. No remuneration is paid to non-executive Directors other than thenominal fees based on their participation at Board and Sub Committee meetings. Total fees and remunerationpaid to all Directors is disclosed at page 39 of the Financial Statements.The Committee met once during the year and proceedings of the Committee were reported to the Board ofDirectors for their information and necessary action and were affirmed by the BoardProf. Sudatta RanasingheChairman-Remuneration Committeeth25 April 201218

UNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R TMANAGING DIRECTOR’S AND CHIEF FINANCIAL OFFICER'SRESPONSIBILITY STATEMENTThe Financial Statements are prepared in conformity with requirements of the Sri Lanka Accounting Standardsissued by The Institute of Chartered Accountants of Sri Lanka, Companies act No.07 of 2007, Sri Lanka AuditingStandards, the Listing Rules of the Colombo Stock Exchange and other applicable statues. The accountingpolicies used in the preparation of the Financial statements are appropriate and consistently applied, unlessotherwise stated in the notes to the accompanying the Financial Statements.The Board of Directors and the management of our Company accept responsibility for the integrity andobjectivity of these Financial Statements. The estimates and judgments relating to the Financial Statementswere made on a prudent and reasonable basis, in order that the Financial Statements reflect in a true and fairmanner, the form and substance of transactions, and reasonably present the Company's state of affairs. Toensure this, the Company has taken proper and sufficient care in installing a system of internal control andaccounting records, for safeguarding assets, and for preventing and detecting frauds as well as otherirregularities, which is reviewed, evaluated and updated on an ongoing basis. Our internal auditors haveconducted periodic audits to provide reasonable assurance that the established policies and procedures of theCompany were consistently followed. However, there are inherent limitations that should be recognized inweighing the assurances provide by any system of internal controls and accounting.The Financial Statements were audited by KPMG , Chartered Accountants the external auditors.The Audit Committee of our Company meets periodically with the internal auditors and the external auditorsto review the manner in which these auditors are performing their responsibilities, and to discuss auditing,internal control and financial reporting issues. To ensure complete independence, the independent auditorsand the internal auditors have full and free access to the members of the Audit Committee to discuss anymatter of substance.H A D U G GunesekeraManaging DirectorG W HewawithanaFinance Managerth25 April 201219

KPMG(Chartered Accountants)32 A, Sir Mohamed Macan Markar Mawatha,P. O. Box 186,Colombo 00300,Sri Lanka.TelFax: + 94 - 11 542 6426: + 94 - 11 244 5872: + 94 - 11 244 6058: + 94 - 11 254 1249: + 94 - 11 230 7345Internet : www.lk.kpmg.comINDEPENDENT AUDITORS' REPORTTO THE SHAREHOLDERS OF UNION CHEMICALS LANKA PLCReport on the Financial StatementsWe have audited the accompanying financial statements of Union Chemicals Lanka PLC, which comprise the balance sheet as atDecember 25, 2011, and the income statement, statement of changes in equity and cash flow statement for the year then ended, and asummary of significant accounting policies and other explanatory notes.Management's Responsibility for the Financial StatementsManagement is responsible for the preparation and fair presentation of these financial statements in accordance with Sri LankaAccounting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to thepreparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error;selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.Scope of Audit and Basis of OpinionOur responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance withSri Lanka Auditing Standards, Those standards require that we plan and perform the audit to obtain reasonable assurance whether thefinancial statements are free from material misstatement.An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit alsoincludes assessing the accounting policies used and significant estimates made by management, as well as evaluating the overallfinancial statement presentation.We have obtained all the information and explanations which to the best or our knowledge and belief were necessary for the purposesof our audit. We there fore believe that our audit provides a reasonable basis for our opinion.OpinionIn our opinion, so far as appears from our examination, the Company maintained proper accounting records for the year endedDecember 25, 2011 and the financial statements give a true and fair view or the Company's state of affairs as at December 25, 20 I 1 andits profit and cash flows for the year then ended in accordance with Sri Lanka Accounting Standards.Report on Other Legal and Regulatory RequirementsThese financial statements also comply with the requirements of Section 151(2) of the Companies Act No. 07 of 2007.CHARTERED ACCOUNTATNTSColomboth25 April 2012KPMG Ford, Rhodes, Thornton & Co., a Sri Lankan Partnershipand a member firm of the KPMG network of independentmember firms affiliated with KPMG International cooperative(“KPMG International”), a Swiss entity.M R Mihular FCAC.P. Jayatilake FCAMs. S. Joseph FCAS.T.D.L. Perera FCAMs. M.P. Perera FCAT.J.S. Rajakarier FCAMs. S.M.B Jayasekara ACAG.A.U. Karunaratne ACAP.Y.S. Perera FCAW.W.J.C. Perea FCAW.K.D.C Abeyrathne FCAR.M.D.B. Rajapakse ACAPrincipals - S.R.I. Perera ACMA, LLB, Attorney-at-Law, H.S. Goonewardene ACA20

UNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R TINCOME STATEMENTFor the year ended 25th December,2011NotesRs.‘000Revenue 4 659,1332010Rs.‘000593,886Cost of sales (517,909) ( 458,381)Gross profit 141,224135,505Other operating income 5 6,390 130Selling expenses (11,143) (10,668)Administrative expenses (32,866) (27,861)Depreciation on property, plant & equipment (10,402) (6,576)Net finance cost 6 (7,743) (5,661)Profit before taxation 7 85,460 84,869Income tax expense 8 (28,385) (30,613)Profit for the year 57,075 54,256Earnings per share (Rs.) 9 38.05 36.17Dividend per share (Rs.) 10 11.00 11.00The figures shown in brackets indicate deductionsThe Notes on pages 24 to 39 form an integral part of these Financial StatementsSTATEMENT OF CHANGES IN EQUITYStated Retained TotalCapital EarningsRs.‘000 Rs. ‘000 Rs.‘000Balance as at 26th December, 2009 15,000 168,612 183,612Final dividend 2009 - (Rs.5.00) - (7,500) (7,500)Interim dividend 2010 - (Rs.5.00) (7,500) (7,500)Profit for the year - 54,256 54,256Balance as at 26th December, 2010 15,000 207,868 222,868Final dividend 2010 - (Rs.6.00) - (9,000) (9,000)Interim dividend 2011- (Rs.6.00) - (9,000) (9,000)Profit for the year - 57,075 57,075Balance as at 25th December, 2011 15,000 246,943 261,943The Notes on pages 24 to 39 form an integral part of these Financial Statements.21

UNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R TBALANCE SHEETthAs at 25 DecemberASSETSNotes2011Rs.‘0002010Rs.‘000Non - Current AssetsProperty, plant and equipment 11 74,759 54,199Receivables 13 207 37774,966 54,576Current AssetsInventories 12 155,900 142,788Trade and other receivables 13 195,458 167,618Cash & cash equivalents 14 3,500 4,843354,858 315,249429,824 369,825Total AssetsEQUITY & LIABILITIESEquityStated capital 15 15,000 15,000Retained earnings 246,943 207,868Total Equity 261,943 222,868Non-Current LiabilitiesRetirement benefit obligations 16 2,849 2,060Deferred tax liabilities 17 5,189 3,7818,038 5,841Current LiabilitiesTrade and other payables 18 34,252 50,213Income tax payable 9,985 16,979Dividend payable 6,264 4,988Import loans ( Secured ) 19 66,124 26,611Bank overdraft (Secured) 14 43,218 42,325159,843 141,116Total Liabilities 167,881 146,957Total Equity & Liabilities 429,824 369,825The Notes on pages 24 to 39 form an integral part of these Financial StatementsIt is certified that the Financial Statements have been prepared in compliance with the requirementsof the Companies Act No 07 of 2007.G W HewawithanaFinance ManagerThe Directors are responsible for preparation & presentation of these Financial Statements.Signed for and on behalf of the Board of Directors,th25 April 2012.Colombo.Dr. P M GunasekeraChairmanA N U JayawardenaDirector22

CASH FLOW STATEMENTCash flows from operating activitiesProfit before Taxation 85,460 84,869Adjustment for :Depreciation on property, plant and equipment 10,402 6,576Provision for retiring gratuity 1,403 682Interest income (102) (98)Provision for bad and doubtful debts 1,800 3,325Gain on disposal of property, plant and equipment (5,729) -Interest expense 7,911 7,320Operating profit before working capital changes 101,145 102,674(Increase) / Decrease in inventories (13,112) (57,349)(Increase) / Decrease in trade and other receivables (29,470) (47,538)Increase / (Decrease) in trade and other payables (16,425) 14,860Cash flows from operating activities 42,138 12,646Retiring gratuity paid (615) -Income tax paid (33,971) (29,112)Interest paid (7,447) (7,307)Net cash flows from operating activities 105 (23,773)Cash flows from investing activitiesUNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R TthFor the year ended 25 December 2011Rs.‘0002010Rs.‘000Purchase and construction of property, plant and equipment (30,978) (14,055)Proceeds from disposal of property, plant and equipment 5,743 -Interest received 102 98Net cash out flows from investing activities (25,133) (13,957)Cash flows from financing activitiesTerm loans obtained during the year 79,359 87,570Repayment of term loans (39,846) (60,959)Dividend paid (16,723) (19,214)Net cash inflows from financing activities 22,790 7,397Net increase / (decrease) in cash & cash equivalents (2,236) (30,332)Cash & cash equivalents at the beginning of the year (37,482) (7,150)Cash & cash equivalents at the end of the year (Note A) (39,718) (37,482)Note (A)Analysis of cash and cash equivalentsCash in hand and at bank 3,500 4,843Short term borrowings (43,218) (42,325)(39,718) (37,482)The Notes on pages 24 to 39 form an integral part of these Financial Statements23

NOTES TO THE FINANCIAL STATEMENTS1. Corporate Information1.1 Reporting entityUNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R TUnion Chemicals Lanka PLC. (“Company”) is a limited liability Company incorporated and domiciledin Sri Lanka. The registered office of the Company is Messrs.Julius & Creasy, 9/5, Thambiah Avenue,thColombo 07 and the principal place of business is situated at P.O.Box 1062, 4 Floor, Sarathi Building,50, Hyde Prk Corner, Colombo 02..In the Report of the Directors and in the Financial Statements, 'the Company' refers to UnionChemicals Lanka PLC1.2 Principal activities and nature of operationsManufacture and marketing of a wide range of polyvinyl/acrylic emulsions for the paint and textileindustries in Sri Lanka and for industrial and domestic use as adhesives. The Company also indents,imports and markets a diverse range of products such as specialty solvents, polyolefins, coatingresins, surfactants, personal care products etc., which are manufactured by the Dow ChemicalsCompany, USA and its affiliates worldwide.1.3 Parent enterprise and ultimate parent enterpriseThere is no significant parent company and Company has a related party relationship with itsDirectors.1.4 Number of employeesThe number of employees at the end of the year was 28 (2009 - 27).1.5 Date of authorization for issueThe Financial Statements for the year ended 25th December 2011 were authorized for issue by theBoard of Directors on 25 th April 20122. Basis of preparation2.1 Statement of complianceThe Financial Statements have been prepared in accordance with Sri Lanka Accounting Standards(SLAS), promulgated by the Institute of Chartered Accountants of Sri Lanka (ICASL) and therequirements of the Companies Act No 7 of 2007 and Sri Lanka Accounting and Auditing StandardsAct No. 15 of 1995.2.2 Basis of measurementThe Financial Statements have been prepared on the historical cost basis except for Defined benefitplan which is measured at the present value of Retirement Benefit Obligations as explained in therespective notes to the Financial Statements.24

NOTES TO THE FINANCIAL STATEMENTS2.3 Functional and presentation currencyThe Financial Statements are presented in Sri Lankan Rupees which is the Company's functionalcurrency. All financial information presented in Sri Lankan Rupees has been given to the nearestthousand, unless stated otherwise.2.4 Use of estimates and judgmentsThe preparation of Financial Statements in conformity with SLAS requires management to makejudgments, estimates and assumptions that affect the application of accounting policies and thereported amounts of assets, liabilities, income and expenses. Judgments and estimates are basedon historical experience and other factors, including expectations that are believed to bereasonable under the circumstances. Hence actual results may differ from these estimates andjudgments.Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accountingestimates are recognised in the period in which the estimate is revised if the revision affects only thatperiod, or in the period of the revision and future periods if the revision affects current and futureperiods.Information about significant areas of estimation uncertainty and critical judgments in applyingaccounting polices that have the most significant effect on the amounts recognised in the FinancialStatements is included in “Measurement of the defined benefit obligations – Refer Note No. 16”.2.5 Foreign currency translationTransactions in foreign currency are translated to Sri Lanka Rupees, which is the functional currency,at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated inforeign currencies at the reporting date are retranslated to Sri Lanka Rupee at the exchange rate atthat date. Non- monetary assets and liabilities denominated in foreign currencies are retranslatedusing exchange rates that existed when the values were determined. The resulting gains and lossesare accounted in profit and loss.3. Summary of Significant Accounting PoliciesThe accounting policies set out below are consistent with those used in previous year. Certaincomparative amounts have been reclassified to conform with the current year's presentation.The Directors have made an assessment of the Company's ability to continue as a going concern inthe foreseeable future, and they do not foresee a need for liquidation or cessation of trading.3.1 Assets and bases of their ValuationUNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R TAssets classified as current assets on the Balance Sheet are cash and bank balances and those whichare expected to be realised in cash during the normal operating cycle or within one year from thebalance sheet date, whichever is shorter.25

NOTES TO THE FINANCIAL STATEMENTS3.1.1 Property, plant and equipment3.1.1.1 Cost and valuationItems of property, plant and equipments are measured at cost less accumulateddepreciation and accumulated impairment losses.3.1.1.2 Owned assetsThe cost of property, plant and equipment includes expenditure that is directlyattributable to the acquisition of the asset. The cost of self-constructed assets includes thecost of materials and direct labour, any other costs directly attributable to bringing theasset to a working condition for its intended use and the costs of dismantling and removingthe items and restoring the site on which they are located.When parts (major components) of an item of property, plant and equipment havedifferent useful lives, they are accounted for as separate items of property, plant andequipment.3.1.1.3 Subsequent costsThe cost of replacing a part of an item of property, plant and equipment is recognised in thecarrying amount of the item if it is probable that the future economic benefits embodiedwithin the part will flow to the Company and its cost can be measured reliably. The carryingamount of the replaced part is derecognised in accordance with the derecognition policygiven below.The cost of the day-to-day servicing of property, plant and equipment are recognised inprofit and loss as incurred.3.1.1.4 DerecognitionThe carrying amount of an item of property, plant and equipment is derecognised ondisposal or when no future economic benefits are expected from its use or disposal. Gainsand losses on derecognition are recognised in profit and loss and gains are not classified asrevenue.3.1.1.5 DepreciationUNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R TDepreciation is recognised in profit and loss on a straight-line basis over the estimateduseful lives of each part of an item of property, plant and equipment. Assets held underfinance leases are depreciated over the shorter of the lease term and the useful lives ofequivalent owned assets unless it is reasonably certain that the Company will obtainownership by the end of the lease term. Freehold land is not depreciated.The estimated useful lives for the current and comparative periods are as follows.Improvements to land20 yearsBuildings 25 yearsPlant and machinery15 yearsFurniture and fittings10 yearsComputer hardware 6 yearsComputer software 5 yearsMotor vehicles3 years26

NOTES TO THE FINANCIAL STATEMENTSDepreciation of an asset begins when it is available for use and ceases at the earlier of thedates on which the asset is classified as held for sale or is derecognised.Depreciation methods, useful lives and residual values are reassessed at each reportingdate.3.1.2 InventoriesInventories are measured at the lower of cost and estimated net realisable value, aftermaking due allowances for obsolete and slow moving items. The cost of inventories isbased on the first-in-first out principle and includes expenditure incurred in acquiring theinventories, conversion costs and other costs in bringing them to their existing location andcondition.Net realisable value is the estimated selling price in the ordinary course ofbusiness, less the estimated costs of completion and selling expenses.3.1.3 Trade and other receivablesTrade receivables are stated at the amounts they are estimated to realize net of provisionsfor bad and doubtful debts.Other receivables are recognised at cost less provision for bad and doubtful debts.3.1.4 Cash and cash equivalentsCash and cash equivalents are defined as cash in hand, demand deposits and short-termhighly liquid investments, readily convertible to known amounts of cash and subject toinsignificant risk of changes in value.For the purpose of cash flow statement, cash and cash equivalents consist of cash in handand deposits in banks net of outstanding bank overdrafts.3.1.5 ImpairmentUNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R TThe carrying amounts of the Company's non financial assets other than inventories anddeferred tax assets, are reviewed at each reporting date to determine whether there is anyindication of impairment. If any such indication exists, or when annual impairment testingfor an asset is required, then the asset's recoverable amount is estimated.The recoverable amount of an asset or cash-generating unit is the greater of its value in useand its fair value less costs to sell. In assessing value in use, the estimated future cash flowsare discounted to their present value using a pre-tax discount rate that reflects currentmarket assessments of the time value of money and the risks specific to the asset. Indetermining fair value, less costs to sell, an appropriate valuation model is used.An impairment loss is recognised if the carrying amount of an asset or its cash-generatingunit exceeds its recoverable amount. Impairment losses are recognised in profit and loss.27

NOTES TO THE FINANCIAL STATEMENTSAn impairment loss is reversed if there has been a change in the estimates used todetermine the recoverable amount. An impairment loss is reversed only to the extent thatthe carrying amount does not exceed the carrying amount that would have beendetermined, net of depreciation or amortization, if no impairment loss had beenrecognised.3.2 Liabilities and ProvisionsLiabilities classified as current liabilities on the Balance Sheet are those which fall due for paymenton demand or within one year from the reporting date. Non-current liabilities are those balancesthat fall due for payment later than one year from the reporting date.All known liabilities have been accounted for in preparing the Financial Statements.3.2.1 Employee benefitsa) Defined benefit plan - Retirement gratuityA defined benefit plan is a post-employment benefit plan other than a defined contributionplan. The Company has provided for the gratuity liability based on the Gratuity FormulaMethod under r Sri Lanka Accounting Standard 16 – Employee Benefits.The Company has funded by way of a gratuity insurance policy the retirement gratuityobligation in respect of 14 employees. Further, a portion of the retirement benefitobligation in respect of the pre-1992 liability for the employees and the liability in respect of10 other employees not covered by the gratuity insurance policy remain unfundedHowever, under the Payment of Gratuity Act No.12 of 1983, the liability to an employeearises only on completion of five years of continual service.b) Defined contribution plans - Employees' Provident Fund & Employees' Trust FundA defined contribution plan is a post-employment benefit plan under which an entitypays fixed contributions in to a separate entity and will have no legal or constructiveobligation to pay further amounts. Employees are eligible for Employees' Provident FundContributions and Employees' Trust Fund Contributions in line with respective Statutesand Regulations. The Company contributes 12% and 3% of gross emoluments ofemployees to Employees' Provident Fund and Employees' Trust Fund respectively and isrecognizes as an expense in profit and loss in the periods during which services arerendered by employees.3.2.2 Short-term benefitsShort-term employees benefit obligations are measured on an undiscounted basis and areexpensed as the related service is provided.3.2.3 ProvisionsUNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R TA provision is recognised if, as a result of a past event, the Company has a present legal orconstructive obligation that can be estimated reliably, and it is probable that an outflow ofeconomic benefits will be required to settle the obligation28

NOTES TO THE FINANCIAL STATEMENTS3.2.4 Trade and other payablesTrade and other payables are stated at their cost.3.2.5 Capital commitments and contingenciesCapital commitments and contingent liabilities of the company are disclosed in therespective Notes to the Financial Statements.3.3 Income StatementFor the purpose of presentation of the Income Statement, the “function of expenses method” isadopted, as it represents fairly the elements of Company performance.3.3.1 Revenue3.3.1.1 Revenue RecognitionUNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R TThe following specific criteria are used for the purpose of recognition of revenue:(a)Sale of goodsRevenue from the sale of goods is measured at the fair value of the considerationreceived or receivable, net of returns and allowances and trade discounts. Revenue isrecognised when the significant risks and rewards of ownership have beentransferred to the buyer, recovery of the consideration is probable, the associated costsand possible return of goods can be estimated reliably, there is no continuingmanagement involvement with the goods, and the amount of revenue can be measuredreliably.(b) Gains on disposal of property, plant and equipmentGains and losses on disposal of an item of property, plant and equipment are determined bycomparing the net sales proceeds with the carrying amounts of property, plant &equipment and are recognised net within “other operating income” in profit and loss.3.3.2 ExpensesAll expenditure incurred in the running of the business has been charged to income inarriving at the profit for the year.Repairs and renewals are charged to profit and loss in the year in which the expenditure isincurred.3.3.3 Research and development costsResearch and development costs are expensed as incurred.3.3.4 Borrowing costsBorrowing costs are recognised as an expense in the period in which they are incurred,except to the extent that they are directly attributable to the acquisition, construction orproduction of a qualifying asset, in which case they are capitalised as part of the cost of thatasset.29

NOTES TO THE FINANCIAL STATEMENTS3.3.5 Finance income and expensesFinance income comprises interest income on funds invested, and gains on translation offoreign currency. Interest income is recognized in the profit or loss as it accrues.Finance expense comprise interest payable on borrowings and losses on translation offoreign currency.3.3.6 Income tax expenseUNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R TIncome tax expense comprises current and deferred tax. Income tax expense is recognisedin profit and loss except to the extent that it relates to items recognised directly in equity,when it is recognised in equity.(a)Current taxCurrent tax is the expected tax payable on the taxable income for the year, using tax ratesenacted at the reporting date and any adjustments to tax payable in respect of previousyears.(a)Deferred taxDeferred tax is recognised in respect of temporary differences between the carryingamounts of assets and liabilities for financial reporting purposes and the amounts used fortaxation purposes.Deferred tax is measured at the tax rates that are expected to be applied to temporarydifferences when they reverse, based on tax laws that have been enacted or substantivelyenacted by the reporting date.A deferred tax asset is recognised for unused tax losses and deductible temporarydifferences to the extent that it is probable that future taxable profits will be availableagainst which they can be utilised. Deferred tax assets are reviewed at each reporting dateand are reduced to the extent that it is no longer probable that the related tax benefit will berealised.3.3.7 Segment reportingA segment is a distinguishable component of the Company that is engaged in providingproducts or services (business segments) or in providing products and services within aparticular economic environment (geographical segment) which is subject to risk andreturns that are different from those of other segments. Segmental information is presentedin respect of the Company's business segments. The primary format business segments arebased on the Company's management and internal reporting structure.Segment results, assets and liabilities include items directly attributable to a segment aswell as those that can be allocated on a reasonable basis.Segment information is presented in Note 20 to the Financial Statements.30

NOTES TO THE FINANCIAL STATEMENTS3.3.8 Earnings per shareThe Company presents basic earnings per share (EPS) for its ordinary shares. Basic EPS iscalculated by dividing the profit or loss attributable to ordinary shareholders of theCompany by the weighted average number of ordinary shares outstanding during theperiod.3.3.9 Cash Flow StatementUNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R TThe Cash Flow Statement has been prepared using the "indirect method".Interest paid is classified as an operating cash flow. Dividend and interest income areclassified as cash flows from investing activities.Dividends paid are classified as financing cash flows.3.3.10 New Accounting Standards Issued but not Effective at the Reporting DateThe Institute of Chartered Accountants of Sri Lanka has issued a new volume of Sri LankaAccounting Standards which will become applicable for annual periods beginning on orstafter 1 January 2012. Accordingly these Standards have not been applied in preparingththese Financial Statements as they are not effective for the year ended 25 December 2011.The Company is currently in the process of evaluating the potential effect of these standardson its Financial Statements and the impact on the adoption of these Standards have notbeen quantitied as at the reporting date.31

NOTES TO THE FINANCIAL STATEMENTS4. Revenue2011Rs. ‘0002010Rs. ‘000Latex 480,970 415,281Chemicals & Plastics 175,607 179,171Indent commission 2,556 1,230659,133 595,682Turnover tax - (1,796)659,133 593,886Value added tax 78,138 71,4825. Other operating incomeGain/(loss) on disposal of property, plant and equipment 5,728 -Scrap material sales and others 662 1306. Finance income (cost)Finance income6,390 130Interest income 102 98Gain on translation of foreign currency 66 1,561Finance costUNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R T168 1,659Interest expense - overdraft (3,202) (3,314)- Import loans (4,709) (4,006)Total finance cost (7,911) (7,320)Net financing cost (7,743) (5,661)7. Profit Before TaxProfit before tax is stated after charging all expensesincluding the followings:Directors' emoluments 10,707 8,727Auditors’ remuneration- Statutory audit 425 385- Audit related service 125 125Provision for bad and doubtful debts 1,800 3,325Staff Cost (7.1) 46,497 42,15432

NOTES TO THE FINANCIAL STATEMENTS2011 2010Rs. ‘000 Rs. ‘0007.1 Staff CostDefined benefit plan cost - Retiring gratuity 1,403 682Defined contribution plan cost - EPF, ETF 3,597 3,082Other staff cost 41,497 38,39046,497 42,1548. Income tax expenseCurrent tax expenseIncome tax on current year profits 24,736 31,730Under provision in respect of previous year 2,241 115Deferred tax expenseUNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R T26,977 31,845Origination and reversal of temporary difference 1,408 (1,232)Income tax expense reported in the Income Statement 28,385 30,613Reconciliation of accounting profit to income tax expenseProfit before tax 85,460 84,869Non business income - Interest income (101) (98)Disallowable expenses 17,980 8,726Allowable expense (6,343) (419)Capital allowances (8,635) (3,848)Taxable income from business activities 88,361 89,230Taxable income from non business activities 101 98Taxable income 88,462 89,328Tax liability @ 12% 4 3Tax liability @ 28% 24,732 31,258Social Responsibility Levy - 469Income tax on current year profits 24,736 31,730Income tax has been provided on the taxable income of the Company at 28% and 12% on incomearising from domestic income and export income respectively.9. Earnings per shareThe calculation of basic earnings per ordinary share is based on the profit attributable to ordinaryshareholders and the weighted average number of ordinary shares outstanding during the year2011 2010Rs.‘000 Rs.‘000Profit attributable to ordinary shareholders (Rs.' 000) 57,075 54,256Weighted average number of ordinary shares 1,500 1,500Basic earnings per share (Rs.) 38.05 36.17There were no potentially dilutive ordinary shares in issue at any time during the year.33

NOTES TO THE FINANCIAL STATEMENTSUNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R T10. Dividend per shareInterim paid -Rs.6.00 (2010 - Rs. 5.00)Final proposed -Rs.5.00 (2010 - Rs. 6.00)Total DividendDividend per share ( Rs.)Dividend proposed2011Rs. '0009,0007,50016,50011.002010Rs. '0007,5009,00016,50011.00thDirectors have proposed a final dividend of Rs. 5.00 per share for the year ended 25 December 2011.st(2010– Rs. 6.00 paid), which will be declared at the Annual General Meeting to be held on 31 May 2012.In accordance with Sri Lanka Accounting Standard No.12 (Revised) Events after the balance sheet date,ththis proposed final dividend has not been recognised as a liability as at 25 December 2011. But incomputing the dividend per share this proposed dividend has been taken into consideration.11. Property, plant and equipmentCostBalanceAs At25.12.2010Rs. '000Additionsduring theyearRs. '000Disposalsduring theyearRs. '000BalanceAs At25.12.2011Rs. '000LandImprovements to landBuildingsPlant & machineryFurniture, equipment and computersMotor vehicles9,1711,7159,11150,81012,65223,702107,161---10,61568719,42930,731---727384,8165,6269,1711,7159,11161,35312,60138,315132,266Accumulated depreciationImprovements to landBuildingsPlant & machineryFurniture, equipments and computersMotor vehiclesNet book amountCapital work-in-progressCarrying amountBalanceAs At25.12.2010Rs. '0008413,74927,6909,29918,90560,48446,6777,52254,199Charge fortheyearRs. '000623653,1107786,08710,402DepreciationonDisposalsRs. '000--727214,8165,610BalanceAs At25.12.2011Rs. '0009034,11430,7289,35520,17665,27666,9907,76974,759Property, plant and equipment includes fully depreciated assets having a cost of Rs 26,750,535/- (2010 - Rs. 30,802,100/-)Directors believe that there is no significant difference between the market value and the book value of the land.34

NOTES TO THE FINANCIAL STATEMENTSUNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R TInformation on the freehold land and building of the Company.LocationV a l u a t i o n o fLand & buildingsE x t e n t( Perches )Floor Area( Sq.Ft)AccommodationMaithrii Mawatha Nil 101.92 6250 FactoryEkala - Ja -ela12. Inventories2011Rs.'0002010Rs.'000Raw materials & consumablesWork-in-progressFinished goodsGoods-in-transitMachinery spare partsThe carrying amount of inventories pledged as security for bank facilities obtained amounted toRs.138,494,414 (2010: Rs. 126,482,102)2011 201013. Trade & other receivablesRs.'000 Rs.'000(a) Receivables within one yearTrade receivablesProvision for doubtful debts(b) Receivable after expiry of one year (employee loans)52,8703,64282,0977,8129,479155,900199,625 162,408(9,853) (8,053)189,772 154,355Indent commission receivableAdvances & prepaymentsValue Added Tax RecoverableOther receivables, deposits and employee loans - b (i)3,023924-1,8479913,8261,739195,45820763,8013,18058,9059,6437,259142,7886,599167,618377(i) Loans to employees (over Rs. 20,000 included above)At begining of the yearLoans granted during the yearRepaid during the yearAt end of the year(ii) No loans have been given to the Directors of the company.14. Cash and cash equivalentsCash in handCash at bankBank overdraftCash & cash equivalents in the statement of cash flows1,2048362,040(979)1,0613753,1253,500(43,218)(39,718)1,2941,0252,319(1,115)1,2043754,4684,843(42,325)(37,482)35

NOTES TO THE FINANCIAL STATEMENTSUNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R T15. Stated capitalIssued and fully paid1,500,000 Ordinary SharesThe holders of ordinary shares are entitled to receive dividends as declared from time to time and areentitled to one vote per share at a meeting of the Company. All shares rank equally with regard to theCompany’s residual assets.16. Retirement benefit obligationsRetiring gratuity is a defined benefit plan covering employees of the Company. The Company's pre 1992liability amounting to Rs. 489,000/- and the provision made for 10 employees who are not covered by theinsurance policy were unfunded and were provided in the books of the Company.Balance as at 26th of DecemberProvision for the yearRetiring gratuity paidBalance as at 25th of DecemberSubsequent to 1992, the externally funded policy purchased from AVIVA NDB Insurance PLC, covers 14employees attached to the Company. The plan is fully funded by a policy obtained from AVIVA NDBInsurance PLC. This policy meets the criteria mentioned in the Sri Lanka Accounting Standard 16,- EmployeeBenefits(SLAS 16), to classify it as a qualifying insurance policy (Plan asset).An actuarial valuation was carried out by Actuarial and Management Consultants (Private) Limited, a firm ofprofessional actuaries. The valuation method used by the Actuary is the-Projected Unit credit Method, themethod recommended by the SLAS 16.The Assets that meet the definition of the plan asset and the related defined benefit obligation liabilities arepresented on a net basis in the balance sheet as prescribed by SLAS 16.Ȧs at the balance sheet date, the fair value of the plan assets amounted to Rs. 8,085,257 and thepresent value of the defined benefit obligation amounted to Rs.6,286,707 which resulted in anet surplus of Rs. 1,798,550.16.1 Movement of the fair value of plan assets and present value of retirement benefitobligation are as followsFair Value of Plan AssetsOpening balanceExpected returnContribution paid to the planBenefit paid by the planNet actuarial gain/(loss)Plan assets as at 25th December2011Rs.’00015,000 15,0002011Rs.’0002,0601,404(615)2,8492011Rs.'0006,529620295(521)1,1628,0852010Rs.’0002010Rs.’0001,378682-2,06036

NOTES TO THE FINANCIAL STATEMENTSUNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R TPresent Value of Defined Benefit ObligationOpening balanceInterest costCurrant service costGratuity paidActuarial (gains)/ lossesPresent Value of the Defined Benefit ObligationResulting Net Asset2011Rs.'0005,785607315(525)1056,2871,79816.2 Acturial assumptionsPrincipal acturial assumptions as at 25th December 2011.Rate of discountExpected salary incrementStaff turnover factor2011 201010.5 % 10.5 %10.0 % 10.0 %7.5 % 7.5 %17. Deferred tax liabilities2010Rs.'000At the beginning of the year 3,781 5,013Origination and reversal of temporary difference1,408 (1,232)At the end of the year 5,189 3,781Deferred tax assets and liabilities are attributable to following2011Rs.'000Property, plant and equipmentRetirement benefit obligationsRs.'000Assets-7987982011 2010Rs.'000 Rs.'000 Rs.'000Liabilities Total Total5,987 5,987 4,565- (798) (784)5,987 5,189 3,78118. Trade and other payables2011Rs.'0002010Rs.'000Trade payables 27,649 41,960Other payables including accruals 4,709 8,046Value added tax payable 1,223 -Interest payable 671 20734,252 50,21337

NOTES TO THE FINANCIAL STATEMENTSUNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R T2011Rs.'00019. Import Loans (Secured)Payable within one yearAt beginning of the year 26,611 -Loans obtained during the year 79,359 87,570Repayment of loans (39,846) (60,959)At end of the year 66,124 26,611Note:The above loans represents import demand loans which are payable within maximum of 120 days.2010Rs.'00020. Segmental analysisNet assetsProfit before taxDepreciation2011 2010 2011 2010 2011 2010Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000Latex 203,823 171,103 62,439 64,365 8,124 6,498Chemicals & Plastics 58,120 51,765 23,021 20,504 2,278 7821. Security on loans261,943 222,868 85,460 84,869 10,402 6,576Borrowing facilities have been secured on the assets as following.Commercial Bank(i) Primary mortgage over Land & building situated at Maithri Mawatha, Ekala Ja-ela for Rs. 43 million.Interest rates:Overdraft - AWPLR + 2% p.a Import Loans - AWPLR + 2% p.aCommercial Bank/NDB Bank(ii) Registered concurrent mortgage over stock in trade and debts of Rs. 20.50 million.NDB Bank(i) Primary mortgage over Land & building situated at Maithri Mawatha, Ekala, Ja-Ela for Rs. 10 millionInterest rates:Overdraft -12.5% p.aImport Loan 12.5%p.aNations Trust Bank(i) Registered concurrent mortgage over stock in trade and debts of Rs. 28 million.Interest rates:Overdraft - AWPLR + 2.5 % p.a. Import Loans - 3M SLIBOR 2% p.a.The above facilities were not overdrawn at the balance sheet date.38

NOTES TO THE FINANCIAL STATEMENTS22. Capital CommitmentsUNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R T(I) Letters of credit and Documents against Acceptance negotiated by the Company as at 25.12.2011amounted to US$.198,403/- & GBP 6,665/- (2010- US$ 201,761/-).(ii) There were commitments made to the value of Rs.69,493,968/- to acquire the property, plant andequipment as at 25.12.2011 ( 2010- Rs.14,380,202/-).23. Contingent liabilitiesThe Company has given a guarantee of Rs.1,500,000 to Sri Lanka Customs Department as at 25.12.201124. Events occurring after the balance sheet date(I) Directors have proposed a final dividend of Rs. 5.00 per share for the year ended 25th December 2011.st(2010 - Rs. 6.00), which will be declared at the Annual General Meeting to be held on 31 May 2012. Inaccordance with Sri Lanka Accounting Standards No 12 (Revised) Events Occuring after the BalanceSheet date, this proposed final dividend has not been recognised as a liability as at 25th December2011.th(ii) The Company acquired land to the value of Rs. 65,875,000/- at Colombo 08. on 11 January 2012for the purpose of construction of its Head Office.(iii)No circumstances have arisen since the Balance Sheet date which would requireadjustments to or disclosure in the Financial Statements.25. Related party disclosureIdentity of the Related PartiesThe Company has a related party relationship with its DirectorsKey Management personnel compensationKey management personnel comprise the Directors of the Company.Directors emoluments for the year ended 25th December 2011 amounted to Rs. 10.71 millionOther transactions with key management personnelMr.H.A.D.U.G.Gunasekera, Director of the Company is also the Managing Director of the Company, has52.58% of the Company's Issued Share Capital at the year end. Directors have no direct or indirectinterest in contracts with the Company, other than above.39

INFORMATION TO SHAREHOLDERSUNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R Tth(1) Ordinary shareholders as at 25 December 2011Number of shareholders - 744 (as at 25.12.2010- 649)No of shares held Resident Non-resident TotalNo. ofNo. ofshares%No. ofshare-No. ofsharesNo. ofshareholdersholdersholders1 - 1,000 684 80,505 5.37 - - - 684 80,505 5.371,001 - 5,000 44 61,837 4.12 - - - 44 61,837 4.125,001 - 10,000 7 57,940 3.86 - - - 7 57,940 3.8610,001 - 20,000 3 40,075 2.67 - - - 3 40,075 2.6720,001 - 30,000 1 29,548 1.97 - - - 1 29,548 1.9730,001 - 40,000 0 0 0 - - - 0 0 040,001 - 50,000 0 0 0 - - - 0 0 050,001 - 100,000 3 197,995 13.20 - - - 3 197,995 13.20100,001 - 1,000,000 2 1,032,100 68.81 - - - 2 1,032,100 68.81share-No. ofshares744 1,500,000 100 - - - 744 1,500,000 100%%25.12.201125.12.2010Categories of shareholders No. of No. of % No. of No. ofshareholders shares shareholders shares %Local Individuals 692 353,759 23.58 605 351,470 23.44Local Institutions 49 1,145,916 76.39 42 1,148,305 76.55Foreign Individuals (non resident) 3 325 0.02 2 225 0.01Foreign Institutions - - - - - -Total 744 1,500,000 100 649 1,500,000 100(2) The percentage of shares held by the public as at 25.12.2011 - 25.69 % (2010- 24.50%)(3) Major shareholders as at 25.12.2011Names No. of Shares %First Capital Markets Limited/ Mr. H A D U G Gunasekera 734,500 48.97Pain Asia Banking Corporation / Dr. S A Gulamhusein 297,600 19.88K. G Investments Limited 88,180 5.88Mrs. K Gunaratnam 55,615 3.71Mr. H A D U G Gunasekera 54,200 3.61Mr. K Gunaratnam (Decd) 29,548 1.97Mrs. L A M Gunasekera 18,695 1.25Mr. K C Vignarajah 11,000 0.73Mrs. S Mahendran 10,380 0.69Mrs. V Wijayawardena 9,687 0.65Mr. G R Pathmaraj 9,687 0.65Ms. S Gunaratnam 9,687 0.65Mrs. P G King 9,687 0.65Mr. U I Suriyabandara 7,292 0.49Colombo Investment Trust PLC 6,400 0.43Colombo Fort Investments PLC5,500 0.37Mr. M Radhakrishnan5,000 0.33Mr. S.K. Hathiramani 4,600 0.31Dr. A.C.Visvalingam 3,646 0.24Mrs. Rathnakumari Someswaran Administratrix of the estate of late3,100 0.21Mr.S.Someswaran40

UNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R TINFORMATION TO SHAREHOLDERS (Contd.)(4)Net assets value per share2011Rs.174.632010Rs.148.58(5)(7)Market value per share(a) Highest recorded during the financial year(b) Lowest recorded during the financial year(c) Year end1,300.00301.00825.00(6) Dividend pay out (%)28.91Dividend paymentsthInterim dividend – Rs. 6.00 per share paid on 19 December 2011thProposed final dividend Rs. 5.00 per share to be declared and payable on 6 June 2012(2010–final dividend Rs. 6.00)400.00274.00300.0030.41Turnover per employeeRs.- ‘00025,00022,50020,00017,50015,00012,50010,0007,5005,0002,50002002200320042005200620072008200920102011Market price per shareVS Net assets per shareRs.9008257506756005254503753002251507502002200320042005200620072008200920102011Market price per shareNet asset per shareRs. -’000Dividend paid17,50016,00014,50013,00011,5009000750060004500300015000200220032004200520062007200820092010201141

UNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R TINFORMATION TO SHAREHOLDERS (Contd.)Rs.Earnings per shareNet assets per shareRs.175Dividend per share40150Rs.351351230251201059010820157560610545301542020022003200420052006200720082009201020110200220032004200520062007200820092010201102002200320042005200620072008200920102011TimesPrice earnings ratioRs.900Market priceRs.- Mn675Revenue2220181682575067560060052545014121085254503753003753002256225150420200220032004200520062007200820092010201115075020022003200420052006200720082009201020117502002200320042005200620072008200920102011Rs.- Mn90ProfitCapital employedRs.- Mn30027080240706050402101801503012020901060020022003200420052006200720082009201020113002002200320042005200620072008200920102011- Tax- Profit after tax- Profit before tax42

UNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R TINFORMATION TO SHAREHOLDERSTEN YEAR SUMMARYthYear ended 25 December 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000Trading ResultsRevenue 659,133 593,886 424,975 526,735 433,338 388,564 347,549 240,237 197,129 169,587Profit before taxation 85,460 84,869 69,543 54,660 37,161 38,204 35,910 22,557 27,917 27,750Taxation (28,385) (30,613) (26,114) (21,435) (16,855) (12,154) (10,361) (4,177) (8,559) (9,937)Profit after taxation 57,075 54,256 43,429 33,225 20,306 26,050 25,549 18,380 19,358 17,813Equity & liabilitiesNon current assets 74,966 54,576 52,487 53,757 53,611 56,982 41,927 37,144 20,771 21,715Current assets 354,858 315,249 212,515 229,124 213,870 204,814 171,105 154,214 107,377 86,331429,824 369,825 265,202 282,881 267,481 261,796 213,032 191,358 128,148 108,046Capital 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000Reserves 246,943 207,868 168,612 137,933 118,208 109,902 95,102 80,803 66,923 58,815261,943 222,868 183,612 152,933 133,208 124,902 110,102 95,803 81,923 73,815Non-current liabilities 8,038 5,841 11,862 12,110 6,179 5,935 5,428 5,679 5,935 5,759Current liabilities 159,843 141,116 69,528 117,838 128,094 130,959 97,502 89,876 40,290 28,472429,824 369,825 265,002 282,881 267,481 261,796 213,032 191,358 128,148 108,046Key IndicatorsEarnings per share (basic) (Rs.)*Net assets Per share (Rs.)*Market price per share (Rs.)Annual sales growth (%)Dividend paid /payable (gross) (Rs.)Dividend per share (Rs.)Return on shareholders’ equityPrice earnings ratio (times)38.05 36.17 28.95 22.15 13.54 17.37 17.03 12.25 12.90 11.87174.63 148.58 122.41 101.96 88.81 83.27 73.40 63.87 54.62 49.21825.00 300.00 155.75 135.25 135.00 175.25 145.00 86.00 58.00 55.0011 40 (19) 22 12 12 45 22 16 516,500 16,500 15,000 12,750 11,250 11,250 11,250 11,250 11,250 11,25011.00 11.00 10.00 8.50 7.50 7.50 7.50 7.50 7.50 7.5022 24 24 22 15 21 21 21 24 2421.68 8.29 5.38 6.10 9.97 10.10 8.5 7.0 4.5 4.6th* Earnings and net assets per share are based on the 1,500,000 shares in issue at 25 December 201143

GLOSSARY OF FINANCIAL TERMSUNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R TACCOUNTING POLICIESSpecific principles, bases, conventions, rules and practices adopted by an enterprise in preparing and presenting thefinancial statements.EARNINGS PER SHAREProfit after taxation divided by the number of ordinary shares in issue.NET ASSETS PER SHAREShareholders funds divided by the number of ordinary shares in issue.RETURN ON SHAREHOLDERS' EQUITYProfit after taxation divided by shareholders funds.PRICE EARNINGS RATIOMarket price of a share divided by earnings per share as reported at that date.GROSS DIVIDENDPortion of profits inclusive of tax withheld, distributed to shareholders.RELATED PARTIESParties who could control or significantly influence the financial and operating policies of the business.CONTINGENT LIABILITIESConditions or situations at the Balance Sheet date, the financial effect of which are to be determined by future eventswhich may or may not occur.CASH EQUIVALENTSLiquid investments with original maturities of three months or less.EQUITYShareholders' funds.CURRENT RATIOCurrent Assets divided by Current Liabilities. A measure of liquidity.44

Environment ManagementUNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R TManagement ApproachWe employ an integrated management approach comprising all environmental implications at all stages of ourprocesses. All our business activities are certified under ISO 14001:2004, integrated with ISO 9001: 2008. Ourprincipal objective is to reduce environmental impacts by managing raw materials, waste, consumption of naturalresources , greenhouse gas emissions and by developing and promoting green solutions to our customers. Smallteam activities promoted by the management are continuously in operation in the areas of “waste elimination andproductivity improvement”, “ Energy conservation and Management”, “Environment, Health and Safety” andenvironment friendly product development.Green ProductsThe R & D team of the company has developed 12 green products using emmerging water- bone technologies whichsupport to reduce volatile organic compounds (VOC) in commercial products, protecting the environment. Theseproducts include 02 textile printing binders, 09 wood coating products and 01 shoe coat. UCLL is currently in theprocess of developing green binders for paint industry.Utilization of Natural ResourcesWe operate our Latex manufacturing facility with minimum consumption of electrical energy and fossil fuel bysuccessfully implementing a comprehensive Energy Conservation and Management programme . Key indicatorshave been developed for performance monitoring and the performance are reported to management in everymonth.Our Company considers water as valuable natural resources and all efforts are made to minimize the use of water. Werecently installed a cooling water recycling plant that saves 75,000 L of valuable water which was simply released tothe environment previously.Rain water harvesting has been taken as the next important step and preliminary investigations work is in progress.Environmental AwardsUCLL applied first time for National Green Award, National Cleaner Production Award and Geo Responsibility Awardlast time. The photograph below evident that the Company has been recognized as environmental responsibleorganization.45

UNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R TFORM OF PROXYI/We the undersigned (please print).............................................................................................................................................................................................................................................................................................................................................................................................................................................................of....................................................................................................................................................................................................................................................................being a member/members of Union Chemicals Lanka PLC do hereby appoint ....................................................................... of....................................................................................................................................................................................................................................................................whom failing PIYANANDA MERVYN GUNASEKERA whom failing HENADIRA APPUHAMILAGE DON UPANANDA GAMINI GUNASEKERAwhom failing AINSLEY NIMAL UBESINGHE JAYAWARDENA whom failing GUNARATNAM RABINDRANATH PATHMARAJ whom failingRANASINGHE MUDALIGE SUDATTA WISHVAMITRA RANASINGHE whom failing TISSA NIHAL JAYASINGHE whom failing RUSSEL DEZILWA whom failing GOTHAMA WARUNA HEWAWITHANA as my/our Proxy to represent me/us *and ………………. to vote on my/ourstbehalf at the TWENTY FOURTH ANNUAL GENERAL MEETING of the Company to be held on31 May 2012 and at any adjournmentthereof, and at every poll which may be taken in consequence thereof. I /We the undersigned hereby authorise my/our proxy to voteon my/our behalf in accordance with the preference indicated below:-1. To receive and consider the Audited Financial Statements for the year ended 25thDecember, 2011 together with the Reports of the Auditors' thereon and the AnnualReport for the said yearForAgainst2.thTo declare a Final Dividend of Rs.5.00 per share for the year ended 25 December, 2011 asrecommended by the Directors3. Directors(I) To pass the Ordinary Resolution numbered 3 (i) set out in the Notice of Meeting of theAnnual General Meeting.(ii)(iii)To pass the Ordinary Resolution numbered 3 (ii) set out in the Notice of Meeting ofthe Annual General Meeting.To pass the Ordinary Resolution numbered 3 (iii) set out in the Notice of Meetingof the Annual General Meeting.4. To re-appoint the retiring Auditors Messrs KPMG, Chartered Accountants, to hold officeuntil the conclusion of the next Annual General Meeting and to authorise the Directors todetermine their remunerationAs witness my/our hand this ……………day of ………………..Two Thousand and Twelve.………………………….Signature of ShareholderNotes:If you wish your Proxy to speak at the Meeting you should insert the words “to speak and” in the place indicated with an asterisk and initial suchinsertion.Please indicate with an "x" in the space provided how your Proxy is to vote. If there is in the view of the Proxy holder doubt (by reason of the way inwhich the instructions contained in the Proxy have been completed) as to the way in which the Proxy holder should vote, the Proxy holder shallvote as he thinks fit.A Proxy holder need not be a member of the CompanyInstructions as to completion appear on the reverse hereof.

UNION CHEMICALS LANKA PLC2 0 1 1 - A N N U A L R E P O R TInstruction as to Completion1. To be valid this Form of Proxy must be deposited at the Company Secretaries Office of theCompany at No.9/5, Thambiah Avenue, Colombo 07 not less than 48 hours before the timeappointed for the holding of the Meeting.2. The instrument appointing a Proxy shall in the case of an individual be signed by theappointor or by his Attorney and in the case of a Company/Corporation, the Proxy Form mustbe executed under its Common Seal, which should be affixed and attested in the mannerprescribed by its Articles of Association or other constitutional documents.3. If the Proxy Form is signed by an Attorney, the relevant Power of Attorney or a notariallycertified copy thereof, should also accompany the completed Form of Proxy if it has notalready been registered with the Company.4. The full name and address of the Proxy holder and of the Shareholder appointing the Proxyholder should be entered legibly in the Form of Proxy.

Concept: Sithma Associates - 2835393