Lanka Floortiles PLC - Colombo Stock Exchange

synergyLanka Floortiles PLCAnnual Report 2010 - 11

VisionOur vision is of a future in which Lanka Floortiles will have become not only ahousehold name but a global one.MissionOur mission is to be a Company that sets and constantly exceeds ourbenchmarks of the highest quality in producing ceramic products ofexceptional beauty and functionality and to cater every need of discerningcustomers both in Sri Lanka and abroad. These traits have kept us at theforefront in our chosen spheres, creating peerless career developmentopportunities within the organization. We believe that the improvement is acontinuing process. It is the constant endeavour of our employees and thedriving force behind our success.ContentsFinancial & Operational Highlights 4Chairman’s Review 7Managing Director’s Review 8Board of Directors 12Management Discussion and Analysis 16Financial Review 20Corporate Social Responsibility 23Human Resources 25The Award Winning Floortile Company 27Corporate Governance 29Risk Management 33Export Destinations 35Annual Report of the Board of Directorson the Affairs of the Company 38Statement of Directors Responsibilities 42Chief Executive Officer’s andChief Financial Officer’s Responsibility Statement 43Remuneration Committee Report 44Audit Committee Report 45Independent Auditor’s Report to theshareholders of Lanka Floortiles PLC 47Balance Sheet 48Income Statement 49Statement of Changes in Equity 50Cash Flow Statement 51Notes to the Financial Statements 52Five Year Summary of Balance Sheet 76Five Year Summary of Income Statement 77Shareholder Information 78Statement of Value Added 80Notice of Meeting 81Notes 82Form of Proxy 83

SynergyWhen two powers become one and are ableto achieve more than ever before…When cohesion is key and a positive attitudeis imperative in all we do…When our focus in providing satisfaction toa vast range of customers and growing farbeyond what is expected…When we are reaping the benefits of mergingwith a powerful entity, becoming more thanthe sum of its parts…We call it synergy.Lanka Floortiles PLC Annual Report 2010 - 11

Fo-2cusWith greatsynergy, comesgreat focus andwe are everopen to thevision of beingbigger andbetter.Lanka Floortiles PLC Annual Report 2010 - 11

3Lanka Floortiles PLC Annual Report 2010 - 11

Financial & Operational Highlights4Revenue3,021Rs.Mn.Net Profit511Rs.Mn.Lanka Floortiles PLC Annual Report 2010 - 11

5A) SUMMARY OF OPERATIONS (GROUP)Year ended 31st March 2011 2010 Change %Export sales (Rs.’000) 161,485 215,851 (25.19)Local sales (Rs.’000) 2,860,244 2,636,360 8.49Gross Revenue (Rs.’000) 3,021,729 2,852,211 5.94Gross Profit (Rs.’000) 1,072,827 865,964 23.89Operating profit (Rs.’000) 708,598 541,000 30.98Net profit (Rs.’000) 511,886 379,088 35.00Production (SqMt) 2,328,559 2,838,009 (17.95)Value addition (Rs.’000) 1,634,012 1,377,229 18.64B) SUMMARY OF FINANCIAL POSITION (GROUP)As at 31st March 2011 2010 Change %Working capital (Rs.’000) 594,198 732,900 (18.93)Net assets (Rs.’000) 2,213,275 1,999,106 10.71Borrowings (Rs.’000) 168,778 331,813 (49.13)Current ratio (Times) 1.92 2.37 (18.98)C) SUMMARY OF EMPLOYMENT STATISTICS (GROUP)Year ended 31st March 2011 2010 Change %Executives (Number) 42 44Supervisory, clerical and allied staff (Number) 103 112Floor level staff (Number) 309 332Total (Number) 454 488 (6.97)Sales per employee (Rs.) 7,427,346 6,505,656 14.17Production per employee (SqMt) 5,129 5,816 (11.81)Net profit per employee (Rs.) 1,127,502 776,821 45.14Value addition per employee (Rs.) 3,599,145 2,822,191 27.53Lanka Floortiles PLC Annual Report 2010 - 11

635%Net Profit GrowthLanka Floortiles PLC Annual Report 2010 - 11

Chairman’s Review7Dear Shareholder,It is my pleasure to present to you the annual report of your Company for the year ended 31st March 2011.PerformanceThe financial year 2011 was a better year in many respects for all businesses in Sri Lanka. Your Company was noexception. The Sri Lankan economy too performed better, registering 8% growth, following the end of three decades ofconflict. The profit after tax of your Company increased 35% from the previous year, to Rs. 511 Mn., a very satisfactoryperformance indeed. However, it should be noted that profitability would have been much higher if not for theunfortunate work stoppage in August 2010, the Company losing 6065 man-days of production. The commendableresults achieved were also inspite of very volatile LPG prices throughout most of the year.Fixed AssetsAs in the past your Company continued to invest in machinery and equipment to upgrade production facilities: Rs. 161Mn. was spent on acquisition of additional plant and machinery. Your Board during the year sanctioned an investmentof Rs. 600 Mn. to increase production capacity by 4000 square meters per day. The machinery requirement for this hasalready been ordered by the Company.AppropriationsThe Company paid a dividend of Rs 3.50 from the profits of the year under review. It consists of a first interim dividendof Rs 1.00 per share in November 2010 and a second interim dividend of Rs. 2.50 per share paid in April 2011. Theamount paid out as dividends or the dividend payout was Rs. 185.6 Mn in the year 2010/11 compared to Rs. 159.1 Mnin 2009/10. This was the highest dividend payout in the history of the Company and I expect this trend of increasingdividend payout to be maintained in the years to come.OutlookThe country’s economic outlook at the time of writing continues to improve, with 8.5% growth registered in the firstquarter of 2011. The Company is taking steps to expand capacity by 40% in 2011/12 to be in a position to benefit fromthe new opportunities that improved economic growth will bring. The increase in production capacity will make ourCompany the largest producer of floor tiles in the country. We are confident of selling this increased capacity as therequisite infrastructure and logistics are now being put in place. I am confident that the Company will report substantialgrowth in earnings in the forthcoming years.SustainabilityThe Company has over the years been investing substantial resources to improve its factory’s ‘environmentalfriendliness’. In fact, these efforts extend way beyond its factory operations to as far as the rehabilitation of new materialmines. Much effort has gone into reducing carbon emissions in the production process, chief among them being yourCompany’s decision to minimize the use of government-subsidized kerosene in favour of LPG in the full knowledgethat the higher cost of this energy-source will impact on profits. We trust shareholders will share our pride when wereport that our success in reducing carbon emissions in the production process was achieved at a cost of Rs. 150 Mn. inpotential profits for the financial year 2010/11.AcknowledgementsI wish to express my sincere appreciation to our valued customers, bankers, distributors and dealers for their continuedsupport and to all employees of the Lanka Floortiles PLC for their loyal and devoted service without which these resultswould not have been possible. I also wish to thank my fellow Directors for their valuable contribution in steering theCompany successfully. In conclusion, I thank the Shareholders for their valuable patronage and confidence.Anthony A PageChairman05th July 2011.Lanka Floortiles PLC Annual Report 2010 - 11

Managing Director’s Review8Economic EnvironmentIn line with expectations Sri Lanka’s economy grew 8% in 2010, fast recovering from the setbacks of the war. All keysectors of the economy reported robust growth supported by improved investor confidence, peaceful local conditionsand, most importantly, the gradual recovery of the global economy from the longest recession in recent history.Macro-economic conditions also improved dramatically with the low rate of inflation aided by low and stable interestrates. The industry grew 8.4% during the year propelled by 15.5% growth in mining and quarrying and 9.3% growthin construction. Your Company was a direct beneficiary of the growth in construction. However, global fuel pricescontinued to pose challenges to the industry’s growth. LPG prices remained volatile during most of the year, fluctuatingwithin a range of approximately Rs. 35/- to Rs. 140/-. The first quarter of 2011/2012 saw LPG prices rising to an all-timehigh of Rs. 139.0 per kg, then dropping to somewhat sustainable levels at the time of writing.However, all in all I must state that your Company operated in an environment that is conducive to growth during theperiod under review.Performance HighlightsI am pleased to report that your Company recorded a profit after tax of Rs. 511 Mn. during the year compared withRs. 379 Mn. reported in 2009/10, a healthy growth in profitability due mainly to higher gross margins achieved by theCompany through better management of the channels of distribution. Gross margins improved from 30% in last year to35% in the year under review.Turnover showed a marginal increase of 6% to Rs. 3.02 Bn. mainly due to constraints in production capacity. Financecosts were sharply down from previous year to Rs. 3.6 Mn. whilst Administration, Selling and Distribution expensesshowed a marginal increase to stay at Rs. 383.4 Mn.I am pleased to report that yourCompany recorded a profit after tax ofRs. 511 Mn. during the year comparedwith Rs. 379 Mn. reported in 2009/10,a healthy growth in profitabilitydue mainly to higher gross marginsachieved by the Company throughbetter management of the channels ofdistribution.As the Shareholders are perhaps aware, the year under review was eventful for your Company in many ways. A numberof strategic changes that will propel the Company to greater heights were effected during the year. I reported in mylast year’s review that the marketing operations of your Company were merged with that of Lanka Walltile PLC. In orderto maximize the synergies of marketing it was decided to adopt a common brand for both floor and walltiles, sincepromoting two brands created customer-confusion, making the operation financially unviable. Having weighed the prosand cons, it was decided to market both floor and walltiles under one “LANKATILES” brand. To facilitate this exerciseas well as to better reflect the line of business, your Company’s name was changed from Lanka Tiles PLC to LankaFloortiles PLC during the year.Lanka Floortiles PLC Annual Report 2010 - 11

9The efforts aimed at maximizing synergies did not stop with merely merging the marketing operations. Lanka FloortilesPLC vacated the premises at 34/5, W A D Ramanayake Mawatha after 25 years and moved to the premises of LankaWalltile PLC at 215, Nawala Road, Narahenpita with effect from February 2011 thereby allowing the two companies tomerge finance and logistical operations as well. This merger of back- and front-office operations of your Company withthose of your holding Company has made operations much more efficient and cost effective.Factory OperationsThe factory operated at 89% capacity during the year, down from 93% capacity achieved during 2009/10. This wasmainly due to the industrial action launched by the unionized work force following the failure of the parties to findcommon ground in negotiations. This industrial action culminated in a total work stoppage at the factory leading to aloss of 6065 man-days of production. This action by employees cost the Company approximately Rs. 60 Mn. in profits.However, the factory recovered quickly from this setback to achieve normal levels of production during the rest of theperiod.In my review last year, I stated that the factory was facing challenges in fully complying with environmental regulationsespecially relating to effluent treatment and noise levels. I also stated that in order to eliminate the noise emanatingfrom the feldspar crusher, this activity was outsourced to Lanka Ceramic PLC who is the main supplier of Feldspar to theCompany. The Company with the assistance of the EEPEx project and the Industrial Technology Institute constructedand commissioned a state-of-the-art effluent treatment plant at a cost of Rs. 11 Mn. However, a few residents in thevicinity of the factory filed action against the Company in the Magistrate’s Court, Homagama. At the time of writing yourCompany is in full compliance with all environmental regulations applicable to factory operations. Additionally, yourCompany spent over Rs. 40 Mn. in making the factory more environment-friendly during the past 2 to 3 years. Besidesoutsourcing the feldspar crushing operation and building a modern effluent treatment plant, the Company invested inthe installation of a water sprinkler system, construction of a dust barrier and in raising of the height of kiln and spraydrierexhaust chimneys to better meet its environmental responsibility. In the light of these, your Company is hopeful ofa favourable outcome of the pending litigation.Lanka Floortiles PLC Annual Report 2010 - 11

10Managing Director’s Review Contd.MarketingAs stated earlier now your Company’s marketing operations are combined with Lanka Walltile PLC. This has benefitedboth companies immensely and also provides a superior service to our discerning customers. Consequently, theexpenditure on marketing and distribution could also be rationalized, providing considerable savings to bothcompanies. A new logo and a brand name were also launched during the year. The Company also opened four newfranchise showrooms that helped the Company improve gross margins. The most noteworthy achievement in the areaof marketing was the completion and successful implementation of the online order processing system for dealers anddistributors during the year. Developed by our IT staff, this is arguably the most advanced and sophisticated onlinedistribution system in the country for which I thank our IT staff profusely.Your Company also upgraded the stores and warehousing facilities to provide a better service to customers. Thewarehouse operated in Rajagiriya was shifted to a location with a better access.Human ResourcesYour Company always considers human resources as its greatest asset. A number of initiatives were undertaken todevelop and retain our talented employees. All executive employees were trained in identifying and using employees’preferences in team-building to maximize employee performance. This was done in two stages with the assistanceof a foreign consultant. Four employees were sent on foreign scholarships and training programs during the year incontinuation of past practice.AssociatesAs I stated in my reviews in the last few years your Company’s associate Parquet (Ceylon) PLC (PCL) has been operatingunsatisfactorily over the last 7 – 8 years. As you are aware PCL underwent a complete restructuring program beginning2009/10 that entailed recapitalization with the conversion of debt to equity, ceasing of timber manufacturing operation,introduction of tile grout and mortar to the market and installation of a silica grinding plant which is in progress at thetime of writing. I am happy to report that all these measures have yielded positive results. You will be happy to note thatPCL posted an operational profit of Rs. 20.1 Mn. during the year. However, these results have been overshadowed bythe loss it incurred on the sale of wood-working machinery.As you are aware, your Company subscribed to the rights issue of shares by PCL to finance acquisition of CeykorAluminium Industries Limited, an aluminium extrusion company. The name of this Company was changed and presentlyknown as Swisstek Aluminium Limited. We believe that this acquisition will complement the line of business of yourCompany. The total investment made by PCL in this acquisition is Rs. 250 Mn. I am happy to note that the resultsof this acquisition have so far been encouraging. Given all of the above, I am hopeful that PCL will make a positivecontribution to the Group in the financial year 2011/12.Lanka Floortiles PLC Annual Report 2010 - 11

11As the Shareholders are perhaps aware,the year under review was eventful foryour Company in many ways. A numberof strategic changes that will propelthe Company to greater heights wereeffected during the year.Future outlookAt the time of writing the Sri Lankan economy is performing satisfactorily and creating strong demand for constructionmaterial. As you are aware, your Company has already embarked on yet another capacity-expansion program costingover Rs. 600 Mn. This entails replacing of a 25-year-old small kiln having a capacity of 2500 sqm per day with a kilnhaving 7500 sqm per day capacity. This will increase the total capacity from current 9500 sqm per day to 13500 sqmper day beginning September 2011. However, the installation of this new kiln will disrupt production and result in a lossof 2500 sqm per day from May to end of August 2011, dampening earnings in the first half of 2011/12. We are alsoexploring a number of other avenues to bring in better returns to our valued stakeholders. I am confident that thesemeasures will result in a significant growth in earnings of your Company in 2011/12.AcknowledgementsIn conclusion, I wish to express my grateful thanks to all the employees of the Lanka Floortiles Group for their devotedservice, which enabled the Group to achieve satisfactory results in the year under review. I also wish to thank ourdealers, distributors, bankers and suppliers for their loyal and continuing support. Last, but not least, I wish to thank theChairman and fellow Directors for the support, guidance and assistance given to me in the discharge of my duties.J A P M JayasekeraManaging Director05th July 2011Lanka Floortiles PLC Annual Report 2010 - 11

Board of Directors12A A PageChairmanMr. Anthony A Page is the Chairman of C T Holdings PLC the ultimate parent company ofLanka Floortiles PLC and counts over 40 years of management experience in a diverse arrayof business segments and serving on the Boards of many companies. He was formerly onthe Board of the Colombo Stock Exchange and a former Council Member of the Employers’Federation of Ceylon.Mr. A A Page is a chartered accountant by profession and is a fellow member of theInstitute of Chartered Accountants of Sri Lanka.Dr. S SelliahDeputy ChairmanDr. Selliah joined the Board of Lanka Floortiles PLC in 2002 and was appointed as theDeputy Chairman of the Company in 2006. Dr. Selliah is also the Deputy Chairman ofLanka Walltile PLC, which is the holding company of Lanka Floortiles PLC and also DeputyChairman of Asiri Group of Hospitals. He also serves as Director of Lanka Tiles Trading(Pvt) Ltd. and Parquet (Ceylon) PLC. He also serves on the board of many other leadingcompanies.Dr. S.Selliah holds a MBBS degree and a Masters Degree.J A P M JayasekeraManaging DirectorHe joined Lanka Floortiles PLC in August 1997 as Executive Director. He was appointed asManaging Director in January 2002 and continues to hold same position at present.In April 2008 he was appointed the Managing Director of Lanka Walltile PLC, the holdingCompany of Lanka Floortiles PLC. He is the Managing Director of Parquet (Ceylon) PLC,Lanka Tiles Trading (Pvt) Ltd, Ceradec (Pvt) Ltd and a Director of Lanka Ceramic PLC.Mr. Jayasekera holds a BSc Special (Hons) degree in Business Administration from theUniversity of Sri Jayawardenapura and is an Associate Member of the Institute of CharteredAccountants of Sri Lanka.P L AmerasingheDirectorMr. Amerasinghe is a fellow Member of the Chartered Management Institute of UK. He isa professional with more than 45 years of Senior Managerial experience which includes 15years in Plantation Management and 17 years as Chief Executive Officer of Lanka WalltilePLC from its inception.He is a founder Director of Lanka Tiles Ltd, now Lanka Floortiles PLC and is on the Boardof Directors to date. Mr. Amerasinghe has been the Managing Director of Aristons (Pvt) Ltdsince 1989 and a consultant to Noritake Lanka Porcelain (Pvt) Ltd. Mr. Amerasinghe alsoestablished Ceyquartz MBI (Pvt) Ltd, a joint venture with Japanese collaboration, of whichhe is the Chairman/Managing Director. He has considerable experience in management ofexport oriented manufacturing organizations and the export and marketing of its productsboth locally and internationally.Lanka Floortiles PLC Annual Report 2010 - 11

13J C PageDirectorMr. Joseph Page is currently the Deputy Chairman/ Managing Director of CT LandDevelopment PLC and the Executive Director of CT Properties Limited. Prior to joining CTLand Development PLC he was the Executive Director of Millers Limited. He has over 25years of management experience in the private sector.A T P EdirisingheDirectorMr. Priya Edirisinghe is a Fellow Member of the Institute of Chartered Accountants of SriLanka, a Fellow Member of the Chartered Institute of Management Accountants (UK) andholds a Diploma in Commercial Arbitration. Having retired from professional practice, he isnow the Consultant/Advisor of HLB Edirisinghe & Co., Chartered Accountants and countsover 39 years experience; of which 23 years in the public practice and 16 years in theprivate sector having held senior positions.V R PageDirectorMr. Ranjit Page is the Managing Director of CT Holdings PLC and the Deputy Chairmanand Chief Executive Officer of Cargills (Ceylon) PLC. He counts over 26 years managementexperience with expertise in food retailing, food services and manufacturing havingintroduced the concept of super marketing to the Sri Lankan masses. He also serves in theBoards of several other Group Companies and is a founder Director of the Mawu BimaLanka Foundation, set up to promote local industry and products.S MendisDirectorDeshamanya Sunil Mendis was formerly the Chairman of the Hayleys Group and theformer Governor of the Central Bank of Sri Lanka. He possesses 41 years wide and variedcommercial experience mostly in very senior positions.Lanka Floortiles PLC Annual Report 2010 - 11

Satisfaction14The customer isour priority andtheir satisfactionmeans that wehave deliveredthe best inproducts andservices.

Management Discussion and Analysis16Business and Industry OverviewLanka Floortiles PLC is a leading manufacturer of glazed ceramic floor tiles and holds the distinction of being thefirst floor tile production company in Sri Lanka, having been in business since 1984. Parent company Lanka WalltilePLC holds a 55% stake in Lanka Floortiles, with the balance held by the public. The company has two subsidiariesnamely Lanka Tiles Trading (Pvt) Limited which sells products that are complementary to its tiling business such aswood flooring, adhesives, tile edging etc and Ceredec (Pvt) Limited, which is also involved in the manufacture of tiles,producing a part of Lanka Floortiles current output. Lanka Floortiles also has an associate company Parquet (Ceylon)PLC, which is in the business of wooden flooring and manufacturing Tile Grout and Tile Mortar.The market for floor tiles is estimated at Rs.13.0 billion, growing at 6% annually. Two large manufacturers dominate themarket, which includes Lanka Floortiles, with several cooperative importers also operating. The industry saw a generalincrease in volume because of macro-economic conditions such as low interest rates and low inflation, which led toimproved investor confidence and increased construction activity in the country.Lanka Floortiles was significantly affected by external market conditions during the year however, with the Companyonly just able to meet a steadily increasing demand for its products, due to limited manufacturing capacity. There isstill considerable room in the market to absorb an increased volume of tiling products and Lanka Floortiles will cater tothis untapped demand through the ongoing expansion plan. Machines were ordered in the year under review and thecommissioning of the new plant will take effect in the current financial year producing an additional 40% capacity.The year under review was one of many challenges for Lanka Floortiles PLC, on both the global and domestic fronts,which affected its operations. With the world recession after effects still lingering and consumption in leading marketssuch as the US and Europe having slow economic growth, Sri Lanka’s main export industries were affected, whichincluded the Company’s exports.Financial PerformanceThe Group posted its highest ever earnings in 2010/11, with a 6% increase in turnover to Rs. 3.02 billion. Gross Profitgrew by 24% to Rs. 1,072 Mn., while Profit after Tax was up by 35% to Rs. 511 Mn. This is the 14th consecutive year inwhich Lanka Floortiles has posted a profit after tax, even though high energy costs impacted on Gross margins, whichincreased marginally to 30% in the year under review, and operating costs increased by 11% to Rs. 2,500 Mn.However the local tile industry experienced a growth in line with the GDP growth. In addition the end of the ethnicwar increased consumer sentiment. That coupled with low inflation and low interest rates drove consumer to investin construction. That is evident from last year economic report which shows that construction grew move than theeconomy as a whole. This improved sentiment gave Lanka Floortiles to improve on its sales and generate higherrevenue.Manufacturing OperationsThe Company operates an ultra-modern factory at Ranala, spread over 30 acres, equipped with the latest technologyand staffed with highly skilled engineers and technicians. The factory, which is currently operating at full capacity, turnsout over of 3 Mn. SqMt a year, which is still short of demand for its products. The Company invested Rs. 161 Mn. tomodernize the factory in the year under review to upgrade plant and install new machinery. The factory produces tilesin the ranges of 20”x 20”, 30”x 30”, 40”x 40” and 50”x 50” sizes. With the expansion project completion in the currentyear there will be new designs sizes and varieties in the floor tiles range. This will give more opportunities to grow theCompany’s market size.Environmental SustainabilityEnvironmental sustainability is a core focus area of the Company in the year review. This clearly visible in most ofpreceding reviews of this report. The highlighted focus was due to the Company identifying this in its risk assessmentand aspect identification programs conducted under ISO 14001, that aspects of dust, effluent and sound neededattention. As a Socially Responsible Company it immediately took measures to control and contain these aspects.Working with the Central Environmental Authority (CEA) , Industrial Technology Institute (ITI) and renowned energyLanka Floortiles PLC Annual Report 2010 - 11

17consultants, it has conducted many projects to reduce effects of these aspects. In the year under review the Companyspent Rs. 25 Mn. in upgrading its environmental compliance system. The key projects that needs to be highlightedis the building of the new water treatment plant, constructing factory drains to reduce effluent load to legal levels,building of additional bins and process improvements to reduce dust generation, and reducing crushing load bybuilding a new crushing plant in Matale in conjunction with Lanka Ceramic PLC and streamlining processes to reducesound emission to compliable levels. All the business units engage in the ISO14001 system, to have a sustainableenvironment management system in the Company. The Company wishes to continue in the years to come thissustainable environmental concept and has planned many projects in this year ahead and in closely working with theCEA. It is also a member of EEPEx project of ITI. The EEPEx (Enhancing Environmental Performance of Export Sectors)objective is the address the environmental aspects of the Company using environmental technology and advice. This inreturn is expected to bring in many returns to the Company.Energy EfficiencyThe energy cost to the Company is approximately 40% of the manufacturing cost. Hence efficient energy usage is akey management control area to reduce cost. The factory mainly uses four types of energy. In order of usage LiquidPetroleum Gas (LPG) is the highest used energy type accounting for 44% of energy cost. The LPG prices for the yearunder review increased by 10%. This is a drastic increase which is not sustainable for the years ahead. The next highestused energy type is Kerosene which accounts for 34% of cost. In the year under review Kerosene price did not changeand remained constant because it was hedged by the Government. However increasing trend of Global Oil Prices andcontinuing losses as state run Ceylon Petroleum Corporation will demand a revision of Kerosene prices upward, in thecurrent year which we have already experienced.The next used energy type is electricity which accounts for 20% of energy bill. The electricity prices were increased inthe last quarter of the financial year by introducing the new CEB tariff rates. This increased the cost of electricity by12.5%. This increased tariff cost will have a adverse impact on the bottom line of the Company. In the current year italso has to be noted that the Ceramic Council which Lanka Floortiles is a member played an important role in informingthe Government of the repercussions. Diesel is the fourth used type of energy which accounts for about 2% of energycost and is used mainly for transport.The Company as practiced in the past continued its energy efficiency projects and looked for viable alternatives. In theyear under review the total energy bill increased by 10% due to comparatively higher global energy prices and new CEBtariff rates. The Company is looking at Coal as a viable energy alternative as stated in the past. The plant is ready to becommissioned in this year provided the Company gets Coal at viable prices, the prices were not viable in the last twoyears.Lanka Floortiles PLC Annual Report 2010 - 11

18Management Discussion and Analysis Contd.Health and SafetyThe Company invested in maintaining safety standards and initiatives at factory level during the year and maintainingthe OHSAS 18001 safety management system. The Company provides its workers with safety suits, goggles and otherequipment and during the year, a project was implemented to upgrade safety equipment, safety guards and safetymechanisms on an ongoing basis, creating a safe and pleasant working environment. Extensive training was alsoconducted in the area of safety practices, so workers are aware of how best to look after their safety at all times.Marketing OperationsIn the under review the Company aggressively pursued challenging its own distribution channels. It continued on itsstrategy of working with Lanka Walltile PLC in a combined marketing flatform to achieve synergy and cost savings. Itincreased its focus on customers service. This was achieved by posting more resources to reduce the channel length.By decreasing the channel length the Company can get the feedback from the customer more quickly, respond to itfaster and service the customer better. This results in better care for customers. To reduce this channel length it openedfour more franchise outlets in Wattala, Malabe, Aluthgama and Dambulla. The Company also continued expand itstraditional channels of distributors, dealers and sub dealers appointing 8 new outlets. However distributors still remainthe main source of business contributing 35% of revenue. The franchise operation increased its contribution to revenueto 12% from 6% last year. However the other channels of direct sales like showrooms consignment agents and regionalsales also contributed to 30% of revenue which was on par with previous year.The Company together with Lanka Walltile PLC launched a new brand called ‘LANKATILES’. This brand was heavilypromoted as you would have noticed. All Company branding was changed in line with this. The Company expects toincrease this as brand image and thereby increase its market share.The Company also focused on reducing its working capital and selling non-moving and stagnant stock by promotingthem via special channels and discounts. This assisted the Company to reduce its cash tied up on capital and increaseits cash inflow. This concept will be continued this year too to manage the working capital effectively.The Company introduced 40 new designs to its markets. This is a significant achievement by the designing department.This is expected to give customer more options and increase their satisfaction of the product portfolio available forselection. With the availability of the ‘My Virtual Home’ software the customer can select tiles virtually to match theirbuilding colour which adds value to their purchasing decision.Lanka Floortiles PLC Annual Report 2010 - 11

19Export MarketsThe Company decreased its export revenue from Rs. 215 Mn. to Rs. 161 Mn. in this year. Core exports markets such asAustralia, Japan and Maldives Island performed better amid global demand volatility because of the Company’s reliableservice and quality products. However, the slow economic recovery of leading markets reduced sales in the year underreview.DistributionThe Company expanded its operations in its ultra modern warehouse complex in Biyagama. The 40,000 Sqft warehousewill serve to the dealers and distributors better by providing an effective location, more space, efficient service andmore variation. The Rs. 200 Mn. project will bring about realisable value addition on channel service.Complementary productsThe Company is looking at further increasing its market share in tile grout and tile mortar. Both of these productsshowed promising growth last year. Both of these complementary products while generating revenue will add value toour core product of tiles.Both products were marketed under a new brand called ‘SWISSTEK’. This brand was also heavily promoted to getmarket share. Pebbles which is a new product was introduced to the market also under the ‘SWISSTEK’ brand.Future OutlookLanka Floortiles is looking at developing a comprehensive five year strategy for the Company, which includes plansto increase manufacturing volumes by 40% over the same period. As such, the Company will continue to invest inproduction capacity to cater to untapped market demand, as well as in new technology so that customers are givena wider choice of designs and sizes to suit their requirements. The Company as stated earlier will add a further 4,000Sqmt per day to the factory capacity at a cost of Rs. 600 Mn. in the current year. An increase in manufacturing capacitywill help the Company to expand its market share and it hopes to expand into the manufacture of glazed porcelain tilesin the current year, with the necessary technology already in place.The strategy for the coming year will focus on strengthening our franchise operations further to sell direct to thecustomer, while maintaining an optimum number of dealers and sub-dealers.The distribution network will also be strengthened further and several complementary products will be added to theCompany’s product range to improve its market share. Several direct marketing campaigns have been lined up in exportmarkets such as Australia, New Zealand and Japan, while locally, the Company is exploring options to capture andincreased market share in less price sensitive segments.The Group faces several challenges in the coming year, including a volatile macro-economic situation, competitionin the construction industry, interest rates, which could impact on borrowing costs and inflation which has a negativeimpact on the purchasing power of customers. High energy prices are also an area of concern, with the Companycontinuing with measures to improve energy efficiency in manufacturing operations and looking at energy alternatives.The Company will strive in its effort to be as socially responsible corporate citizen by having sustainable businesspractice and serving the society at all possible avenues. Considering all factors the Company envisages a successfulyear ahead in its operations.Lanka Floortiles PLC Annual Report 2010 - 11

20Financial ReviewThe year under review has been a challenging year to the Company as well as almost all of the companies in Sri Lanka.The ending of the ethnic conflict had a positive impact to the economy of Sri Lanka, while the continuing effects of theGlobal Financial Crisis affected the exports of the country and the Company. These in return affected the Companyperformance. However benefiting from the positive impacts, the Company was able to deliver profits with a highergrowth as done in the past 14 years continuously. The capability of the company to deliver exceptional results in thesechallenges circumstances must be commended.EconomyIn the economy, inflation increased marginally throughout the year starting at 5.8% in April 2010 and ending at 8.6% inMarch 2011 but remained in single digit level. The interest rates measured by 6 month average AWPLR decreased from10.7% in April 2010 to 9.3% in March 2011. These two economic indicators resulted in lower input prices for buildingmaterial and higher bank credit resulting in higher spending by consumers in construction and higher investment in theindustry. In the last year GDP grew by 8% and construction industry grew by 9.3%. This resulted in improved businessoperations to the Company. This had a direct impact on the Company operations leading to higher revenue and lowerfinance costs. In addition there was volatility in the global exchange rates and markets which affected the Company’simports which are in Euro and exports which are in AUD.RevenueThe Company revenue increased by 6% to Rs. 3,021 Mn. for the year. Export revenue decreased by 25% to Rs. 161.0Mn., while local revenue increased by 8% to Rs 2,860 Mn. The major input to local sales come from distributor salessector which contributed to 35% of local sales. The Company sales turnover trend for the last five years is given onthe graph below. The turnover achieved shows an increasing trend. Within the year there was no price increase. Salesvolume also did not increase significantly in the year under review.ProfitsNet profit before tax increased by 45% to Rs. 710 Mn. and Net Profit after Tax increased by 35% in the year to Rs. 511Mn. from Rs. 379 Mn. last year. The main reasons being the increase in sales and better working capital management.The income tax expense increased by 79% to Rs. 198 Mn. The lower finance cost was due to lower borrowings andpositive cash flow. Operating profit increased by 31% to Rs. 708 Mn. due to better sales margins and cost reductionsachieved in manufacturing. This was detailed in the operations review. The five year Profit analysis is given below.BorrowingsShort term borrowings of the Company decreased by Rs. 60 Mn. to Rs. 87 Mn. compared to last year and long termborrowing decreased by Rs. 103 Mn. to Rs. 81 Mn. This was mainly due to decrease in working capital in stocks andcash flow improvement from operating activities. Stocks increased by Rs. 19 Mn. and debtors decreased by Rs. 56 Mn.The higher market trend and complementary economic conditions had a positive effect in cash inflow. The cash positionRs. Mn.Profit After TaxRs. Mn.Sales (With VAT)6004,0004003,0002,0002001,000007 08 09 10 11007 08 09 10 11Lanka Floortiles PLC Annual Report 2010 - 11

21of the Company was a positive Rs. 133 Mn. compared to a positive of Rs 137 Mn. in the prior year. This was mainly dueto increase in the cash inflow from operating activities of Rs 47 Mn. compared to last year. Company has been able tocontrol and manage the debt and cash flow within acceptable limits.2007 2008 2009 2010 2011Borrowings (Rs. Mn.) 534 349 592 331 168AWPLR (6 mth avg) 15.2% 17.6% 19.6% 10.7% 9.3%PerformanceThe share price of the Company increased to a high of Rs. 143.00 from a low of Rs. 87.00 in the period mainly dueto the positive market trends. In the year the number of shares increased from Rs. 42.4 Mn. to Rs. 53.0 Mn. due tocapitalization of reserves by way of issue of one share for every four shares held. The EPS increased from Rs. 7.15 toRs. 9.62 due to high profits, the net assets per share increased from Rs. 36.14 to Rs 40.06 due to cumulative earningsincrease. The dividend per share decreased from Rs. 3.75 to Rs. 3.50 due to increased number of shares. The five yeartrend for the above performance indicators are given below.2007 2008 2009 2010 2011Earnings per Share (Rs.) 5.15 5.90 5.33 7.15 9.65Net assets per Share (Rs.) 20.91 28.46 31.29 37.68 41.72Dividend per Share (Rs.) 3.75 4.12 2.60 3.75 3.50Year End Price per Share (Rs.) 49.00 63.50 28.50 87.75 131.00InvestmentsThe Company invested Rs. 161 Mn. in the year under review to upgrade the manufacturing capabilities. This comprisednew 1,000 KVA Generator, Electrical System upgrade and a new Tile loading machine among others in the factoryto upgrade process and improve productivity. The continuing investment is necessary in manufacturing to improveproductivity and deliver consistent production. This includes Rs. 25 Mn. which was invested in improving environmentalcompliance in the factory by building a new water treatment plant, crushing plant, effluent drainage system and a watersprinkler system.Rs. Mn.BorrowingsRs.Dividend Per Share60054400320021007 08 09 10 11007 08 09 10 11Lanka Floortiles PLC Annual Report 2010 - 11

22Financial Review Contd.OutlookThe company has made stable progress in the last 15 years and has been able to deliver even in trying circumstances.This is due to its effective and efficient management system, financial system, adherence to good business practices,corporate governance and code of conduct. With the end of the ethnic conflict and downturn of the global financialcrisis it is expected that higher growth can be achieved in the current year. The relaxation of forex rules, interest ratesand reduction of inflation will add further impetus to the economy and the construction industry. This will in turn drivethe Company to post better results in the current year.Rs. Mn.EquityRs. Mn.Market Capitalisation2,5008,0002,0006,0001,5001,0004,0005002,000007 08 09 10 11007 08 09 10 11Lanka Floortiles PLC Annual Report 2010 - 11

23Corporate Social ResponsibilityThe Company sees Corporate Social Responsibility as the responsibility of the Company to ensure that the decisionstaken by it have a positive impact on the society and the environment while transcending transparent and ethicalbehaviour that is consistent with sustainable development and contribute to the welfare of the society and allstakeholders concerned. The Company manages its business process to produce an overall positive impact on thesociety and to exceed ethical, legal, communication and public expectations. The Company practices this to create longterm shareholder value and having a sustainable business. At Lanka Floortiles we are committed to support the broadercommunity and less privileged in the society.The Corporate Social Responsibility principleis observed by the Company at all times in itsactivities. The Company does not offer anyservice or activity that is socially unhealthy.Further the Company has taken all possiblemitigating actions for any interventionswhich affect the environment. It also doesnot deal with any supplier who is not sociallyresponsible or makes low quality productscreating a risk to the user. The Companydoes not compromise on quality, safety orenvironmental sustainability. The Company aspolicy practices equal opportunity employmentwithout biasness to gender, race, religion orethnicity and in fact it has a combination of allthese classes of people in its payroll.As stated earlier the Company is committed to uphold the highest standard of integrity and transparency in thegovernance of its affairs. It complies to the applicable legal framework while adheres to the rules of the Colombo StockExchange and Securities and Exchange Commission of Sri Lanka.As in the past the Company took a four prong approach to widen its Corporate Social Responsibility program. Thoseare firstly uplift the tiling industry, secondly by making donations to various charitable organizations, thirdly caring forthe neighbours of the Company and fourthly caring for its employees.Lanka Floortiles PLC Annual Report 2010 - 11

24Corporate Social Responsibility Contd.The Company uplifted the tiling industry by having 12 tiler training programs. This training programs upgrades the skillsof tile layers and raises their working standards. The tilers are then well recognized in the field, who in return contributeto professional approach in completing the tile laying job while have a good return for their service and manage theirlifestyle better. These programs were held around the Country with the assistance of many local and governmentinstitutions. The Company bears the full cost of the program which includes consultation fees, logistics, food and studymaterials. This will be a continuing program which will help uplift the industry over time and bring about sustainability tothe industry. This program benefited about 500 persons for the last year.As for caring for the neighbours the Company worked closely with schools, temples and local authorities around thefactory to help uplift their lifestyle. Our continuing project of upgrading the Dedigamuwa Dispensary is now completed.It is expected that this will help many people in that area to get their medical needs attended without a hassleand happily. The Company also contributed to many schools and temples in the vicinity to complete their projectssuccessfully, so that the surrounding people benefited. In addition the Company constructed a culvert in the vicinity,gave illumination by installing street lights in the vicinity, concreted a side road near the factory and constructed a canalto drain waste water to river. This uplifted the lifestyle of the neighbouring people.In the aspect of donating to charitable institutions, the Company donated approximately Rs. 0.2 Mn. in cash andapproximately 100,000 Sqft of tiles to worthy institutions such as Ceylon School for Deaf and Blind, Helpage Sri Lanka,Sri Lanka Sumithrayo and SOS Children’s Villages. In addition many schools and religious places also got donations ingoods and in finance. The Company hopes this would have helped them complete in their relevant projects.The Company to care for its employees have given them a safe and secure work place with more than average industrybenefits. Health and safety was a key area when Corporate Social Responsibilities is concerned. The Company hasOHSAS 18000 certification in place. Due to focused training, inbuilt Health and Safety practices, internal safety auditsand quick decision making the number of accidents in the factory showed a drastic decline, as detailed in the HumanResources Report.In addition to this there is free medical service, free workman compensation and a medical insurance scheme for allemployees concerned which has immensely helped them to stay healthy. Areas of fire response, first aid and accidentprevention were addressed, which led to a healthy workplace for all employee resulting in reduced industrial incidents.,and a safe workplace.The Company practices a socially responsible environmental management system. The Company also moved forward increating a better environmental around the factory by reducing dust, sound and effluent. This was done by upgradingthe effluent plant, process improvement and building new walls and drains. The Company invested Rs. 11 Mn. inbuilding a new water treatment plant in consultation with ITI.In addition the Company invested Rs. 3 Mn. to construct new drain system to control effluent flow and reduce effluentpollution. These projects and has resulted in a marked improvement in the green concept. As means of improvingits workplace and caring for society it wants to have a sustainable environment management system, hence it has inplace an ISO 14001 environmental Management System. To uplift the environment, it reduces its effluent, by treatingprocess water, reduces air pollution by avoiding emissions and decreasing dust by building new raw material bins,blocking walls, reducing heaping height for raw materials and reducing dust making operation such as heavy vehiclemovements and movement in dusty roads. The Company also reduced sound emission by building sound insulationaround generator and decreasing crushing load. The Company invested Rs. 10 Mn. in building a new crushing plantand reduce sound pollution in the factory. Also the Company has built a water sprinkler system to reduce dust emission.Altogether the Company has approximately Rs. 40 Mn. in the recent years to upgrade in environment compliance andresponsibility. The Company is looking at investing further to increase the green concept manufacturing in its operationsby reducing waste and practicing energy efficient manufacturing.In the current year while country its care to the industry. The Company will invest further its environmental upgrading,safe working practices and have productive and efficient manufacturing process. It will continue its donations to therelevant charitable organizations and institutions.Lanka Floortiles PLC Annual Report 2010 - 11

Human Resources25Lanka Floortiles PLC is a Company that drives forward vigorously to achieve business excellence. In this vigorousdrive Human Resources plays a vital role. Lanka Floortiles always strives to have a skilled, well-trained, hard workingemployees whose passion is to achieve ambitious business goals. The last year is a testimony for this aspiration, witha profit growth of 35%, and a revenue growth of 6%, it has excelled beyond expected targets. Human Resourceseffectiveness or the contribution of all employees is commendable and is recognizable in this circumstances. It is ademonstration of the Companies strategic use of Human Resources to achieve business goals. Hence, the Companytarget of retaining skilled workforce, rewarding and recognizing them has paid off and will pay of in the future also whenthe Company drives on this path of successfulness.The Company as a policy practices equal opportunity employment without biasness to gender, race, religion or ethnicityand in fact it has a combination of all these classes of people in its payroll. Another policy is to attract recruit and retainsuitably qualified and technically skilled people for its vacancies.In the year under review at the end of the period there were 454 employees, 7% of last year total of 488. It consistedof 42 executives, 103 supervisory, clerical and allied staff and 309 floor level staff. In addition some non-core processeswere outsourced to get skill balance and effective management. The floor level employees are unionized under the InterCompany Workers Union. They work under a Collective Agreement. The Collective Agreement which was effective from01st January 2007 expired on 31st December 2009. As stated on the last year report the new Collective Agreementwas being negotiated at the time of printing last year report was completed in the year under review on 31st August2010. The management viewed this as an opportunity to engage in complex dialogue with the employees and identifytheir requirements and needs. This is involved to ensure that employees are satisfied and happy and most importantlycontribute productively to achievement of Company objectives. However as stated in Chairman’s and ManagingDirectors’ reviews , the negotiations culminated in an industrial strike which resulted in the closure of the plant for 14days and losing 6,065 man-days production.However, many lessons were learned and bonds strengthened after this event which the Company expects will drive thebusiness forward more productively and effectively.Employees productivity rose in all main key indicators as descried in the following table except for production becauseof the reasons described above.Year ended 31st MarchKey indicators per employee2007 2008 2009 2010 2011Remuneration & welfare (Rs.) 428,737 490,702 472,405 562,940 708,348Profit after Tax (Rs.) 543,729 612,591 577,392 776,821 1,127,502Value addition (Rs.) 1,994,524 2,278,143 2,422,074 2,822,191 3,599,145Sales (Rs.) 4,639,679 5,555,844 5,942,318 6,505,656 7,427,344Production (Sqmt) 5,618 6,092 6,175 5,816 5,129Health and SafetyHealth and safety was a key development area whenemployees’ benefits are considered. The Company has OHSAS18000 certification in place. Due to focused training, inbuiltHealth and Safety practices, internal safety audits and quickdecision making the number of accidents in the factory showeda drastic decline. This is evident from the graph below.In addition to this there is free medical service, free workmancompensation and a medical insurance scheme for allemployees concerned which has immensely helped themto stay healthy. Areas of fire response, first aid and accidentprevention were addressed, which led to a healthy workplace1050for all employee resulting in reduced industrial incidents. 07 08 09 10 11Nos.252015Number of AccidentsLanka Floortiles PLC Annual Report 2010 - 11

26Human Resources Contd.Training and DevelopmentIn the year under review several in-house and outside training programs were conducted to uplift employees skillsand knowledge in association with institutions such as NIBM, ITI, EDB, CIMA, CIM and ICASL. Training programs inareas of 5S, production psychology was conducted in the year under review to increase production in the factory. TheCompany invested Rs. 5.8 Mn. as employee development in the year under review and many employees participatedand upgraded their skills. In addition in-house training programs such as Health and safety, environmental management,energy efficiency were conducted to match management key focus area requirements. Since the Company vigorouslypractices the ISO 9001, ISO 14001 and OHSAS 18000 systems the employees encounter a well rounded managementsystem in the workplace and a culture of continuously development and personal growth is enabled.Employees AssessmentAll employees are assessed via a performance appraisal scheme, which includes executives also. This is a extensivescheme which identification the contribution, strengths, weakness, skills and values and its alignment to Companyobjectives.Benefits to EmployeesAll employees are rewarded with salary increase based on the performance appraisal and also share a profit share bonusannually and production achievement bonus monthly. All employees earn above industry standard compensation andbenefits.In addition employees enjoy subsidized meals, tea and biscuits. They also get a full paid annual trip to increase morale.In the year the employees participated on annual trip to Batticaloa. There also have a fully-fledged Volleyball court andGym, which was upgraded in the year under review. This can be utilized to upgrade their fitness and wellness.For the current year the Company is looking at upgrading benefits and assure industrial peace and achievement of coreobjectives via Human Resources development and business and industrial excellence to keep up its motto of being aAward Winning Floor Tile Company.Rs. ‘000Remuneration &Welfare Per EmployeeRs. ‘000Profit After Tax PerEmployee8001,200600900400600200300007 08 09 10 11007 08 09 10 11Rs. ‘000Sales Per EmployeeSq. MtProduction Per Employee8,0008,0006,0006,0004,0004,0002,0002,000007 08 09 10 11007 08 09 10 11Lanka Floortiles PLC Annual Report 2010 - 11

27The Award Winning FloortileCompanyWinner of the National Gold Award in the large industries category – Ceylon National Chamber of IndustriesAchiever of Industrial Excellence 2002. (Inaugural year)Winner of the National Gold Award in the large industries category – Ceylon National Chamber of IndustriesAchiever of Industrial Excellence 2003. (For the second successive year)Gold Award from the National Chamber of Exporters of Sri Lanka, in the “Extra Large” Industry category, inrecognition of our export performance in 2003.Merit Award in the category of Ceramic Products and Excellence Award in the category – Trade Stalls atARCHITECT 2003.Certificates of Recognition in the Annual Report Competition conducted by the Institute of Chartered Accountantsof Sri Lanka, consequently for the last eight years.Merit Award from the National Chamber of Exporters of Sri Lanka, in the “Extra Large” Industry category, inrecognition of our export performance in 2005.Winner of the Large National Merit Award at the Ceylon National Chamber of Industries Achiever of IndustrialExcellence 2006.1st Runner-up (manufacturing sector) of the ‘National Business Excellence Awards 2006” by the National Chamberof Commerce of Sri Lanka.Bronze Award from the National Chamber of Exporters of Sri Lanka, in the “Extra Large” Industry category, in NCEExport Awards 2006.Silver Award in the National Extra Large category - Ceylon National Chamber of Industries Achiever of IndustrialExcellence Awards 2007Bronze Award overall winner at the National Business Excellence Awards 2007 from the National Chamber ofCommerce of Sri LankaWinner of the manufacturing sector of the “National Business Excellence Awards 2007” by the National Chamberof Commerce of Sri Lanka.Winner of the manufacturing sector (large category) at the “National Business Excellence Awards 2007” by theNational Chamber of Commerce of Sri Lanka.Lanka Floortiles PLC Annual Report 2010 - 11

28The Award Winning Floortile Company Contd.Winner of the Excellence in Performance Management Practices at the “National Business Excellence Awards2007” by the National Chamber of Commerce of Sri Lanka.Merit Award of the manufacturing (large category) of The Sri Lanka National Quality Awards 2007 from Sri LankaStandards Institution. Silver Award in the National Extra Large category at “CNCI Achiever Awards - 7th Achievers of Excellence 2008”by the Ceylon National Chamber of Industries.Silver Award in the Extra Large category Industry Sector at “NCE Export Awards 2007” by the National Chamber ofExporters of Sri Lanka.Bronze Award overall winner at the National Business Excellence Awards 2008 from the National Chamber ofCommerce of Sri LankaWinner of the Large Category Award at the National Business Excellence Awards 2008 by the National Chamber ofCommerce of Sri Lanka.Winner of the Manufacturing - Chemical & Ceramic Sector at the “National Business Excellence Awards 2008” bythe National Chamber of Commerce of Sri Lanka.Runner-up for ‘Best Tech Savvy Company’ at the ‘National Business Excellence Awards 2008” by the NationalChamber of Commerce of Sri Lanka.Silver Award in the National - Extra Large Manufacturing Sector at ‘CNCI Achiever of Industrial Excellence Awards2009” by the Ceylon National Chamber of IndustriesSilver Award in the Extra Large category Industry Sector at “NCE Export Awards 2008” by the National Chamber ofExporters of Sri Lanka.Bronze Award - Manufacturing Companies in the Annual Report Awards 2009 conducted by the Institute ofChartered Accountants of Sri Lanka. Runner-up for ‘Excellence in Performance Management Practice’ at the National Business Excellence Awards 2009’by the National Chamber of Commerce of Sri LankaLanka Floortiles PLC Annual Report 2010 - 11

29Corporate GovernanceThe Directors are responsible for protecting the rights and interests of shareholders and are accountable to them for theoverall management of the Company.The Board of Directors of Lanka Floortiles PLC is committed to upholding the highest standards of integrity andtransparency in its governance of the Company and its subsidiaries. It is guided by the Code of Best Practice of theInstitute of Chartered Accountants of Sri Lanka, the requirements of the Securities and Exchange Commission of SriLanka and the Colombo Stock Exchange.The compliance of Lanka Floortiles PLC to the Code of Best Practice on Corporate Governance issued by the Instituteof Chartered Accountants of Sri Lanka and the Securities and Exchange Commission of Sri Lanka is as follows:Code of Best Practice in GovernanceA.1 - The BoardFrequency of Board MeetingsResponsibility of the BoardCompliance with applicable lawCompany SecretaryIndependent judgmentDedication of adequate time and effortAppropriate training for DirectorsA2 - Chairman and CEODivision of responsibilities between theChairman and CEOLanka Floortiles AdherenceA. DirectorsThe Board met on a monthly basis in the year under review. The Board’sAudit and Remuneration sub committees met on 06 occasions.The Board is responsible for:a. The formulation and implementation of a sound business strategy.b. Monitoring compliance of governance, laws and regulations.c. Overseeing systems of internal control and risk management.d. Approving annual budgets and strategic plans.e. Appointing and reviewing the performance of the Managing Director.f. Approving any change in the Group’s business portfolio and sanctionmajor investments and disinvestments in accordance with parametersset.g. Ensuring that effective remuneration, reward and recognition policiesare in place to assist employees in giving their best.h. Submitting themselves for re-election at regular intervals and at leastonce in every three years.The Board ensured in the year under review that the Company adhered toall applicable laws, rules and regulations.The services and advice of the Company Secretary M/s. PW CorporateSecretarial (Pvt.) Ltd. is made available to Directors as necessary. TheCompany Secretary keeps the Board informed of new laws, regulationsand requirements coming into effect which are relevant individually asDirectors and collectively to the Board.The Board members are required to divulge all functions with theCompany, refrain from matters of self interest and to bring independentjudgement to the decision making process.Board members attend all Board meetings in person and need to beprepared to engage in decision making matters which may entail anadequate amount of time and effort spent.All Directors have considerable experience in managing Companies andthe ceramic industry. Relevant training opportunities are made availableto all Directors locally and internationally to further their knowledge andexpertise.There is a clear division of responsibility at the head of the Company.This is between the running of the Board (Chairman) and the executiveresponsibility of overseeing the Company’s business (Managing Director).No single individual has liberal powers with regard to decision making.Lanka Floortiles PLC Annual Report 2010 - 11

30Corporate Governance Contd.Code of Best Practice in GovernanceA.3 - Role of the ChairmanPrepare good corporate governanceand facilitate effective discharge ofBoard functionsA.4 - Financial AcumenAvailability of sufficient financial acumenand knowledge.A.5 - Board BalanceThe Board should have an adequatenumber of Directors with a balance ofexecutive and non-executive Directors ofsufficient calibre along with independentDirectors.Lanka Floortiles AdherenceThe Chairman is responsible for the efficient conduct of Board meetings.The Chairman maintains close contact with all Directors and holds informalmeetings with Non-Executive Directors whenever necessary.The Board includes three senior Chartered Accountants, who possessthe necessary knowledge and competence to offer the Board guidanceon financial matters. One of them serves as the Chairman and the othersserve as the Managing Director and a non executive independent director.The Board comprises of 08 executive and non-executive Directors.Directors’ status is as follows:A. A. Page (Chairman) - Non executiveDr. S. Selliah (Deputy Chairman) - Non executive - IndependentJ. A. P. M. Jayasekera (Managing Director) - ExecutiveP. L. Amerasinghe (Director) - Non executive - IndependentA. T. P. Edirisinghe (Director) - Non executive – IndependentV. R. Page (Director) – Non executiveS. Mendis (Director) – Non executive - IndependentJ. C. Page (Director) – Non executiveThe Board of Directors is of the view that the period of service as a Boardmember exceeding Ten years rendered by Mr. P L Amerasinghe doesnot compromise his independence and objectivity in discharging hisfunctions as a Director. Dr. S Selliah and Mr. A T P Edirisinghe are alsoDirectors of Lanka Walltile PLC. However, after taking into considerationthe fact that they are not actively involved in the Management of LankaWalltile PLC and furthermore, since they do not directly hold a significantpercentage of shares in Lanka Floortiles PLC, the Board is of the viewthat their independence is also not compromised. Accordingly, the Boardhas determined that Mr. P L Amerasinghe, Dr. S Selliah and Mr. A T PEdirisinghe are ‘independent’ Directors as per the criteria set out in theListing Rules of the Colombo Stock Exchange.A.6 - Supply of InformationRelevant information and agenda tobe circulated in a timely manner to theBoard.A.7 - Appointments to the BoardProcedure for the appointment anddisclosure of new Directors/ Assessmentof Board compositionA.8 - Re-electionRe-election of Directors at regularintervals.In the year under review the Board appointed Mr. V R Page as a nonexecutive director and Mr. S Mendis as independent Non executiveDirector to the Board to strength Board balance, experience andindependence.The Board papers are circulated a week prior to Board meetings with anadequate briefing on relevant information.The appointment to the Board is undertaken by the Board itself, takinginto consideration the Board composition required and the strategic inputrequired. All Board appointments are informed to the SEC as per theexisting regulations.As per the Articles of Association one third of non executive Directorshereto offer themselves for re-election each year by Shareholders.Lanka Floortiles PLC Annual Report 2010 - 11

31Code of Best Practice in GovernanceA.9 - Appraisal of Board PerformanceBoards should periodically appraise theirown performance in order to ensurethat responsibilities are discharged in asatisfactory manner.Lanka Floortiles AdherenceThe Board regularly evaluates its performance based on achievement ofresults, implementation of strategy, risk management, internal controls,compliance with laws and stakeholder requirements.A.10 - Disclosure of information with respect to DirectorsShareholders at all times should be All Directors have declared their details in page 12 as Director profiles.aware of relevant details with respect toDirectors.A.11 - Appraisal of Chief Executive OfficerThe Board should be required to assessthe performance of the CEO annually.B.1 - Remuneration ProcedureFormal and transparent procedure fordeveloping policies on remuneration.Composition and disclosure of themembers of the RemunerationCommitteeThe CEO is evaluated each year as per the yearly targets that has beenagreed with the annual budgetB. Directors’ remunerationThe Board has implemented a formal and transparent procedure fordeveloping policies on remuneration by setting up a RemunerationCommittee. Its purpose is to assist the Board of Directors in mattersrelating to compensation of the Company’s Directors, Executive Officersand such other employees as determined by the Committee.The Remuneration Report which is in Page 44 of the report addresses allrelated matters.B.2 - The level and make up of RemunerationLevels of RemunerationRemuneration levels have been designed to attract, retain and motivateDirectors and Senior Management required to run the Companysuccessfully, while remaining within the industry’s remuneration standards.B.3 - Disclosure of RemunerationDisclosure of Remuneration in theAnnual ReportDetails of the Remuneration Committee and the statement ofremuneration policy are provided in the Annual Report.The aggregate remuneration paid to Executive and Non executiveDirectors are disclosed on Page 68 of this Report.C. Relations with ShareholdersC.1 - Constructive use of the Annual General MeetingBoards should use the Annual GeneralMeeting to communicate withshareholders and encourage theirparticipation.C.2 - Major TransactionsDisclosure of major corporatetransactions that will materially effect thenet asset base.D.1 - Financial ReportingThe Board should present a balancedand understandable assessment ofthe Company’s financial position,performance and prospects.The active participation of shareholders at the AGM is encouraged. TheBoard believes the AGM is a means of continuing effective dialogue withShareholders.There have been no transactions during the year under review, which fallwithin the definition of ‘Major Transactions’ in terms of the Companies Act.D. Accountability and AuditThe Annual Report of the Company provides a balanced andunderstandable assessment of the Company which is in addition to theaccounts of the management and financial reviews, Director’s report andresponsibility structures.Lanka Floortiles PLC Annual Report 2010 - 11

32Corporate Governance Contd.Code of Best Practice in GovernanceD.2 - Internal ControlThe Board should maintain a soundsystem of internal control to safeguardshareholders’ investments and theCompany’s assets.Lanka Floortiles AdherenceYour Board has taken necessary steps to ensure the integrity of the Group’saccounting, financial reporting and internal control systems and alsotheir review and monitoring on a periodic basis. Our systems coveringrisk management, financial and operational control, ethical conduct,compliance with legal and regulatory requirements and corporate socialresponsibility are detailed below.D.3 - Audit CommitteeThe Board should establish formal The Audit Committee Report on Page 45 of the report addresses thisand transparent arrangements in section in full.the manner in which they select andapply accounting policies, financialreporting, internal control principles andmaintaining an appropriate relationshipwith the Company’s Auditors.D.4 - Code of Business Conduct and EthicsCompanies must adopt a Code ofBusiness Conduct and Ethics forDirectors and members of the SeniorManagement team and promptlydisclose any waivers of the Code forDirectors or others.D.5 - Corporate Governance DisclosuresDirectors should be required to disclosethe extent to which the Companyadheres to established principlesand practices of good CorporateGovernance.The Code of Best Practice issued by the Institute of Chartered Accountantsof Sri Lanka and the Securities Exchange Commission is adopted by theDirectors who then ensure that the Company and the employees behaveethically.Adhered to as per the Corporate Governance report in the Annual ReportPage 29.E. ShareholdersE.1 - Shareholder VotingInstitutional shareholders should be All institutional shareholders are encouraged to participate and their viewsencouraged to ensure their voting are communicated to all concerned.intentions are translated into practice.E.2 - Evaluation of Governance DisclosuresInstitutional investors should beencouraged to give due weight to allrelevant factors drawn to their attention.F.1 - Investing / Divesting DecisionIndividual shareholders, should beencouraged to carry out adequateanalysis in investing or divestingdecisions.F.2 - Shareholder VotingIndividual shareholders should beencouraged to participate in the GeneralMeeting of Companies and exercisetheir voting rights.The Report contains the Company’s Corporate Governance process andstructure for investor’s attention.F. Other InvestorsThe Annual Report contains sufficient information to make an informeddecision. The report is hosted in Colombo Stock Exchange website withthe quarterly reports to facilitate investors and shareholders to makeinternal decisions.All shareholders are encouraged to participate at the Annual GeneralMeeting / Extraordinary General Meeting and cast their votes. AGM’s arenoticed in advance as per Companies Act and held on accessible area toensure shareholders can participate effectively.Lanka Floortiles PLC Annual Report 2010 - 11

Risk Management33IntroductionRisk Management is a critical requirement for any company operating in a competitive market and in a changingeconomy. Lanka Floortiles PLC henceforth has taken a strategic initiative to identify the areas relevant to theorganization and respond to potential risks the Company may be exposed to. The risk management process will enableadministration to evaluate strategies existing within the organization to mitigate the risk factors identified, gain comfortover the continuation of the business and ensure the required returns to the stakeholders. This process additionallyassists the Company in managing sustainability of growth and profitability. The objective is to improve performanceand decision making through identification, evaluation and management of key risks. The process is supervised by theCompany’s Executive Committee and Board of Directors and reviewed by the Audit Committee. The Company plansand objectives are achieved within a framework of acceptable risk. A review of risks of Lanka Floortiles PLC and themitigatory action taken is described below.Business Environment Risk ManagementEnvironment risk arises when there are external forces that may affect the viability of the enterprise’s business model,including the fundamentals that drive the overall objectives and strategies that define it. Actions of competitors or newentrants to the market might impair the firm’s competitive advantage or even threaten its ability to survive. Adversepolitical actions may be harmful to the firm ’s resources and future cash flows in a country in which the firm has investedsignificantly and is dependent on a significant volume of business. Changing laws could be detrimental to the firm’scapacity to conclude important transactions, enforce contractual agreements or implement specific strategies andactivities. Changing regulations are possibly unfavourable to the firm’s competitive position and its capacity to efficientlyconduct business. Changes in opportunities and threats, capabilities of competitors and other conditions affecting thefirm’s industry damages the attractiveness or long-term viability of the industry.The Company has a widespread multi channel distribution system and using existing economies of scale obtainseffective pricing, creating barriers to new entrants. Lanka Floortiles also has an effective market intelligence gatheringsystem so that it is aware of any new entrants and of opportunities and threats in the market place, helping to minimisesmarket risk.To counter political and regulation risk the Company brings the relevant issues to the notice of government institutions,persistently monitors them and maintains close relationships with relevant government institutions. The Companyalso assists government institutions in formulating new laws and regulations pertaining to the industry and providesinformation on relevant issues to government institutions. In addition, a legal feasibility evaluation has been made astandard process in order to approve capital projects.The Company is a Member of the Ceramic Council, the EDB and the main Chambers of Commerce, and maintainsclose relationship with these institutions, in order to influence regulatory changes and to identify and study industryviability, its strengths, weaknesses, opportunities and threats and to react accordingly, enhance links with suppliers andcustomers and influencers stakeholders to identify industry issues and address them accordingly.Operations Risk ManagementOperations risk is the risk that the inefficient in executing the firm’s business model, satisfying customers and achievingthe company’s quality, cost and time performance objectives. Unproductive operations threaten the Company’s capacityto produce goods at or below cost levels incurred by competitors or world-class performing companies. This mayadditionally be attributed to the firm’s business process which are not effectively acquiring, managing, renewing anddisposing the assets of the business; poorly aligned operations with the strategies driving the firm’s business model; arenot satisfying customer needs; are not creating value; or are diluting value by exposing significant financial, physical,information and intellectual assets to unacceptable losses, risk-taking, misappropriation or misuse. These risks affect thesuccess with which the firm executes its business model.The Company has a strong operational control mechanism where production, quality, cost and efficiency are monitoredon a daily basis and improvement projects are undertaken to increase efficiency. Plant upgrades with new plants andLanka Floortiles PLC Annual Report 2010 - 11

34Risk Management Contd.machinery are done annually to be on par with world class manufacturers. In addition, a five year strategic plan has beenimplemented to enhance capacity and ensure operations run smoothly. Training and incentive are given to employeesto improve efficiency, address any gaps in skills and enhance motivating factors in order to reach this objective.Capacity Risk ManagementInsufficient capacity will pose a hindrance to the Company’s ability to meet customer demands or excess capacitythreatens the firm’s ability to generate competitive profit margins.Presently the firm has identified that it needs more capacity and therefore a Capacity Expansion Program has beenplanned for next 5 years and reviewed monthly. This includes installation of the new kiln, importing tiles to meet specificdemands and implementing the capacity expansion plan to monitor financial and resources requirements.Integrity Risk ManagementIntegrity risk is the risk of management fraud, employee fraud, illegal acts, unauthorized acts and any or all of whichcould lead to loss of reputation in the marketplace.The Company conducts a monthly internal audit of transactions undertaken by an independent firm of charteredaccountants, to detect and reduce fraud and detail approval processes for official transactions which mitigate theabove risk. In addition quarterly audit committee meeting to monitor the reporting status coupled with monthly Boardmeetings which supervise the financial status of the Company and the integrity of employees.Financial Risk ManagementExposure to lower returns or the necessity to borrow due to shortfalls in cash or expected cash flows or variances intiming or significant movements in interest rates expose the firm to a number of negative factors. Those include higherborrowing costs, lower investment yields or decreased asset values and result in financial risk. Movements in prices,rates, indices and such, affect the value of the Company’s financial assets and stock price, which may additionally impactits cost of capital and/ or the ability to raise capital.Credit limits and given credit is reviewed through a detailed approval process reducing risk of debt, exports underDA terms are insured using SLECIC and monthly overdue debtors are reported to the Board for necessary action.These actions reduce cash flow risk and all capital projects are financially evaluated to ensure that inflows match withborrowings. Both floating and fixed rate debt is maintained and is structured using loans, share capital and internal fundmanagement to reduce borrowings.Due to this Effective Risk Management Process the Company has had a positive cash flow and reduced debtorsposition. This has led to reduced borrowings for short term requirements and increased profits for the business.The Board has prioritised to manage financial risk in the year under review and enhancing its ability to respondeffectively and efficiently to any changes thereon.ConclusionHence the management is of the view that adequate risk management framework is in place to minimse all potentialrisks to the Company.Lanka Floortiles PLC Annual Report 2010 - 11

35Export DestinationsKarachiOsakaKobeBangaloreMaleChennaiSingaporeFremantleMelbourneBrisbaneSydneyAucklandLittletonLanka Floortiles PLC Annual Report 2010 - 11

37FinancialinformationAnnual report of the Board of Directors on the affairs of the Company 38 Statement of Directors Responsibilities 42Chief Executive Officer’s and Chief Financial Officer’s Responsibility Statement 43 Remuneration Committee Report 44Audit Committee Report 45 Independent Auditor’s Report to the shareholders of Lanka Floortiles PLC 47Balance Sheet 48 Income Statement 49 Statement of Changes in Equity 50 Cash Flow Statement 51Notes to the financial statements 52

38Annual Report of the Board of Directorson the Affairs of the CompanyThe Directors of Lanka Floortiles PLC have pleasure in presenting their Annual Report together with the AuditedFinancial Statements of the Company for the year ended 31st March 2011.1. GeneralPursuant to the requirements of the new Companies Act No. 07 of 2007, the Company was re-registered on 19th March2008 and bears registration number PQ129.2. Change of name of the CompanyAt an Extraordinary General Meeting of the Company held on 30th December 2010, the name of the Company waschanged to Lanka Floortiles PLC.3. Change of registered address of the CompanyThe Registered address of the Company was changed to No.215, Nawala Road, Narahenpita, Colombo 5 with effectfrom 15th February 2011.4. Principal activities of the Company and review of performance during the yearThe main activity of the Company, which remains unchanged since the previous year, is the manufacture and sale ofglazed ceramic floor tiles.A review of the business of the Company and its performance during the year with comments on financial results andfuture strategies and prospects are contained on the Managing Director’s review.This report together with the financial statements reflect the state of affairs of the Company.5. Change of the nature of business of Parquet (Ceylon) PLCParquet (Ceylon) PLC which is an associate of Lanka Floortiles PLC have purchased the majority shares in CeykorAluminium Industries Limited on 21st October 2010. Ceykor Aluminium Industries Limited is in the aluminium extrusionsmanufacturing industry.6. Financial statementsThe financial statements of the Company and the Group are given on pages 48 to 75.Summarised group financial results 31st March2011 2010(Rs ‘000) (Rs ‘000)Revenue 3,021,729 2,852,211Net profit for the year 511,886 379,0887. Auditors’ reportThe Report of the Auditors on the financial statements of the Company is given on page 47.8. Accounting policiesThe accounting policies adopted by the Company and the Group in the preparation of financial statements are given onpages 52 to 56 which are consistent with those of the previous year.9. Statement of directors’ responsibilityThe Directors are responsible for preparing and presenting the financial statements of the Company and the Groupto reflect a true and fair view of their state of affairs. The Directors are of the view that these financial statements havebeen prepared in conformity with requirements of the Sri Lanka Accounting Standards, the Companies Act No. 07 of2007 and the Listing Rules of the Colombo Stock Exchange.10. DirectorsThe names of the Directors who held office as at the end of the accounting period are given below:Executive DirectorMr. J A P M Jayasekera (Managing Director)Lanka Floortiles PLC Annual Report 2010 - 11

39Non-Executive DirectorsMr. A A Page (Chairman)Mr. J C PageMr. V R Page (Appointed with effect from 25th January 2011)Independent Non Executive DirectorsDr. S Selliah (Deputy Chairman)Mr. P L AmerasingheMr. A T P EdirisingheMr. S Mendis (Appointed with effect from 25th January 2011)In accordance with Article No.103 and 104 of the Articles of Association of the Company, Mr. P L Amerasinghe and Mr.J C Page retire by rotation and, being eligible, are recommended for re-election.Mr. V R Page and Mr. S Mendis who were appointed to the Board on 25th January 2011 are due to retire at theforthcoming Annual General Meeting in terms of Article No. 110 of the Articles of Association of the Company, andbeing eligible, are recommended for re-electionMr. S R De Silva resigned from his directorate with effect from 30th July 2010.11. Interests registerThe Company maintains an interests register in terms of the Companies Act, No. 07 of 2007, and the names of Directorswho were directly or indirectly interested in a contract or a related party transaction with the Company during theaccounting period under review are given in Note 28 to the financial statements on page 72 to 75.12. Directors’ remunerationThe Directors’ remuneration is disclosed in Note 19 to the financial statements on page 68.13. AuditorsMessrs PricewaterhouseCoopers, Chartered Accountants served as the auditors during the year under review. Based onthe written representation made by the auditors, they do not have any interest in the Company other than as auditorsand tax consultants.The audit fee payable to the auditors for the year under review is Rs. 516,000/-.The auditors have also provided tax compliance services during the year and the fee payable therefore amounts toRs. 189,000/-.The auditors have expressed their willingness to continue in office. A resolution to re-appoint the auditors and toauthorise the Directors to determine their remuneration will be proposed at the Annual General Meeting.14. Stated capitalThe stated capital of the Company is Rs. 900,967,696/- (2010 - Rs. 429,455,656/-).The number of shares issued by the Company stood at 53,050,410 fully paid ordinary shares as at 31st March 2011(2010- 42,440,328 fully paid ordinary shares).15. Capitalization of reservesIn pursuance of a resolution passed by the shareholders on 24th September 2010, a sum Rs. 477,453,690/- from andout of Rs. 1,040,324,000/- standing to the credit of the revenue reserve account (retained earnings) in the books of theCompany as at 31st March 2010 was appropriated as stated capital to and amongst the shareholders as at the end oftrading on 24th September 2010 and 10,610,082 ordinary shares were issued and distributed as fully paid-up ordinaryshares amongst such shareholders in the proportion of one (01) new ordinary share for every four (04) existing ordinaryshares held as at the said date.Accordingly, pursuant to such capitalization of reserves, the stated capital of the Company increased fromRs. 429,455,656/- to Rs. 900,967,696/-.Lanka Floortiles PLC Annual Report 2010 - 11

Annual Report of the Board of Directors on the Affairs of theCompany Contd.4016. Directors’ shareholdingThe shareholdings of the Directors of the Company are as follows:As at 31st March 2011 2010Mr. A A Page 357,425 282,940Dr. S Selliah - -Mr. J A P M Jayasekera 148 119Mr. P L Amerasinghe 2,135 1,708Mr. J C Page 7,988 6,391Mr. A T P Edirisinghe 4,592 3,674Mr. V R Page - -Mr. S Mendis - -17. Major shareholders, distribution schedule and other informationInformation on the twenty largest shareholders of the Company, distribution schedule of the number of shareholders,percentage of shares held by the public, market values per share as per the Listing Rules of the Colombo StockExchange are given under investor information.18. ReservesThe movements of reserves during the year are given under the statement of changes in equity on page 50.19. Capital expenditureThe total capital expenditure during the year amounted to Rs. 360.80 Mn. compared to Rs. 99.5 Mn. incurred inthe previous year. Details of movements in property, plant and equipment are given under Note 5 to the financialstatements.20. Company’s land holdingsThe book value of Property, Plant and Equipment as at the balance sheet date amounted to Rs. 32.8 Mn. (2010 Rs.20.5 Mn.) for the Company and Group.The extents, locations, valuations and the number of buildings of the Company’s land holdings are given below.Location No. of Buildings Lands in Extent Valuation(Perches) Rs. ‘000Factory at Jaltara, Ranala 41 4,060 324,800Land adjacent to the factory 4 1,188 113,332Warehouse at Biyagama 2 336 218,354Ball Clay land at Kalutara 0 841 52TOTAL 47 6,425 656,538The movement on fixed assets during the year is given in Note 5 to the financial statements.21. DividendA second interim dividend of Rs. 2.50 per share for the year ended 31st March 2010 was paid on 17th June 2010. Aninterim dividend of Rs. 1.00 per share for the year ended 31st March 2011 was paid on 23rd November 2010. Further, asecond interim dividend of Rs. 2.50 per share for the year ended 31st March 2011 was paid on 26th April 2011.The Directors do not recommend a final dividend for the year ended 31st March 2011.22. Substantial shareholdingsThe Company is controlled by Lanka Walltile PLC, which holds 54.51% (2010 - 54.51%) of the issued share capital of theCompany. Lanka Walltile PLC itself is a subsidiary of Lanka Ceramic PLC which, in turn is a subsidiary of CT HoldingsPLC.23. Public holding43.79% (2010 - 33.22%) of the issued shares of the Company are in the hands of the public.Lanka Floortiles PLC Annual Report 2010 - 11

4124. ContributionsThe Company has made contributions totalling Rs. 223,435/- (2010 - Rs. 364,778/-) during the year ended 31st March2011 for charitable purposes.25. Events occurring after the balance sheet dateNo Circumstances have arisen since the balance sheet date, which would require adjustment to, or disclosure in thefinancial statements.26. Corporate governanceThe Directors confirm that the Company complies with the Listing Rules of the Colombo Stock Exchange on CorporateGovernance.An audit committee and a remuneration committee function as Board sub-committees with Directors who posses therequisite qualifications and experience. The composition of the said Committees is as follows;Audit committeeMr. A A Page - ChairmanDr. S SelliahMr. J C PageRemuneration committeeDr. S Selliah - ChairmanMr. P L AmarasingheMr. S R de Silva (Resigned with effect from 30th July 2010)27. Statutory paymentsAll statutory payments due to the Government of Sri Lanka and on behalf of employees have been made or accrued forat the balance sheet date.28. Environmental protectionAfter making adequate enquiries from management, the Directors are satisfied that the Company operates in a mannerthat minimises the detrimental effects on the environment and provides products and services that have a beneficialeffect on the customers and the communities within which the Company operates.29. Going concernThe financial statements are prepared on going concern principles. After making adequate enquiries from management,the Directors are satisfied that the Company has adequate resources to continue its operations in the foreseeablefuture.30. Annual General MeetingThe Notice of the Annual General Meeting appears on page 81.By order of the BoardLanka Floortiles PLCA A PageChairmanJ A P M JayasekeraManaging DirectorP W Corporate Secretarial (Pvt) Ltd.SecretariesColombo05th July 2011Lanka Floortiles PLC Annual Report 2010 - 11

42Statement of Directors ResponsibilitiesThe Directors are required by the Companies Act, No. 7 of 2007 to prepare financial statements for each financial year,which give a true and fair view of the statement of affairs of the Company as at the end of the financial year and theincome and expenditure of the Company for the financial year.The Directors are also responsible to ensure that the financial statements comply with any regulations made under theCompanies Act which specifies the form and content of financial statements and any other requirements which apply tothe Company’s financial statements under any other law.The Directors consider that the financial statements presented in this Annual Report have been prepared usingappropriate accounting policies, consistently applied and supported by reasonable and prudent judgments andestimates and in compliance with the Sri Lanka Accounting Standards, Companies Act, No. 7 of 2007, Sri LankaAccounting and Auditing Standards Act No. 15 of 1995.The Directors are responsible for ensuring that the Company keeps sufficient accounting records, which disclose thefinancial position of the Company with reasonable accuracy and enable them to ensure that the financial statementshave been prepared and presented as aforesaid. They are also responsible for taking measures to safeguard the assetsof the Company and in that context to have proper regard to the establishment of appropriate systems of internalcontrol with a view to prevention and detection of fraud and other irregularities.The Directors continue to adopt the going concern basis in preparing the financial statements. The Directors, aftermaking inquiries and review of the Company’s Business Plan for the financial year 2010/2011, including cash flows andborrowing facilities, consider that the Company has adequate resources to continue in operation.By Order of the BoardLanka Floortiles PLCP W Corporate Secretarial (Pvt) LtdSecretaries05th July 2011Lanka Floortiles PLC Annual Report 2010 - 11

Chief Executive Officer’s and ChiefFinancial Officer’s ResponsibilityStatement43The financial statements are prepared in compliance with the Sri Lanka Accounting Standards issued by the Institute ofChartered Accountants of Sri Lanka and the requirements of the Companies Act No. 7 of 2007 and any other applicablestatues to the extent applicable to the Company. There are no departures from the prescribed accounting standardsin their adoption. The accounting policies used in the preparation of the financial statements are appropriate and areconsistently applied, except where otherwise stated in the notes accompanying the financial statements.The Board of Directors and the management of your Company accept responsibility for the integrity and objectivity ofthese financial statements. The estimates and judgments relating to the financial statements were made on a prudentand reasonable basis, in order that the financial statements reflect in a true and fair manner, the form and substanceof transactions, and reasonably present the Company’s state of affairs. To ensure this, the Company has taken properand sufficient care in installing a system of internal control and accounting records, for safeguarding assets, and forpreventing and detecting frauds as well as other irregularities, which is reviewed, evaluated and updated on an ongoingbasis. Our internal auditors have conducted periodic audits to provide reasonable assurance that the establishedpolicies and procedures of the Company were consistently followed. However, there are inherent limitations that shouldbe recognized in weighing the assurances provided by any system of internal controls and accounting.The financial statements were audited by M/s. PricewaterhouseCoopers, Chartered Accountants, the independentauditors.The Audit Committee of your Company meets periodically with the internal auditors and the independent auditors toreview the manner in which these auditors are performing their responsibilities, and to discuss auditing, internal controland financial reporting issues. To ensure complete independence, the independent auditors and the internal auditorshave full and free access to the members of the Audit Committee to discuss any matter of substance.It is also declared and confirmed that the Company has complied with and ensured compliance by the auditors with theguidelines for the audit of Listed Companies where mandatory compliance is required.J A P M JayasekeraManaging DirectorB T T RocheHead of Finance05th July 2011Lanka Floortiles PLC Annual Report 2010 - 11

44Remuneration Committee ReportRole of the Remuneration CommitteeThe Committee reviews the performance of the executive staff against the set objectives and goals, and determines thecompensation policy of the Company for all levels of employees. The Committee supports and advises the Board onremuneration and remuneration related matters and makes decisions under delegated authority with a view to aligningthe interests of employees and Shareholders.Composition of the Remuneration CommitteeThe Remuneration Committee is a sub - committee of the main Board, to which it is accountable. The RemunerationCommittee comprises of the following non-executive - independent Directors.1. Dr. S Selliah - Chairman of the Committee2. Mr. P L Amerasinghe - Member of the Committee3. Mr. S R de Silva - Member of the Committee (Resigned with effect from 30th July 2010)The Managing Director attends the Committee meeting by invitation and serves as the Secretary of the Committee.The Committee members possess vast experience in the fields of Business Management, Human ResourcesManagement, Labour Relations and Labour Law. Hence the Committee has adequate expertise in Remuneration Policyand management to deliberate and propose necessary changes, improvements to meet the roles and responsibility ofthe Committee.MeetingsThe Remuneration Committee met 02 times during the year. The attendance of the members at the meeting is asfollows.Dr. S Selliah - Chairman of the Committee – 2/2Mr. P L Amerasinghe - Member of the Committee – 2/2Mr S R de Silva - Member of the Committee – 2/2 (Resigned with effect from 30th July 2010)Tasks of the Remuneration Committeea. Ensuring that the Board complies with the Companies Act in relation to Director remunerations, especially therequirements of section 216. And it also ensures that employees are adequately compensated based on theirperformance and contribution for the period under review and future potential.b. Constructing a specific cost of employment structure that enables Company to attract and retain a quality andrepresentative staff in its operations and do this inter alia with reference to appropriate market rates where these arerelevant, and benchmarking specific categories where required.c. Ensuring internal equity and fairness in and between the various pay categories.d. Building incentives in the cost of employment structure to encourage and reward excellent performance, onobjectively defined criteria.e. Recognising basic needs of staff, and ensuring that compensation addresses those.f. Ensuring that staff costs are within the budget set by the Board, and are sustainable over time.ConclusionThe Committee is satisfied that it has completed the responsibilities that were delegated to it by the Board for the yearunder review and the necessary objectives were achieved for the year under review.Dr. S SelliahChairman - Remuneration Committee05th July 2011Lanka Floortiles PLC Annual Report 2010 - 11

45Audit Committee ReportRole of the Audit CommitteeThe audit committee is a sub committee of the main Board to which it is accountable. The primary function of theAudit Committee is to assist the Board in its oversight of the integrity of the financial statements of the Company,the qualifications, independence and performance of the Company’s independent auditor, the performance of theCompany’s internal audit function, and compliance by the Company with legal and regulatory requirements.Composition of the Audit CommitteeThe Audit Committee comprises of the following three non – executive Directors.1. Mr. A A Page - Chairman2. Dr. S Selliah3. Mr. J C PageThe Managing Director and the Head of Finance attend meetings at the invitation of the Audit Committee. TheManaging Director functions as the Secretary of the Audit Committee. Representatives of external auditors and internalauditors also attend Audit Committee meetings by invitation.The Audit Committee, whose Chairman is a Chartered Accountant has the required expertise in finance and businessmanagement to deliberate Audit Committee matters and recommend necessary action to be taken.MeetingsThe Audit Committee met 04 times during the year. The attendance of the members at the meeting is as follows.Mr. A A Page – 4/4Dr. S Selliah – 4/4Mr. J C Page – 4/4Tasks of the Audit Committeea. The Committee reviewed the provisional financial statements for the four quarters that were published for financialyear 2010/11 and the Annual Report of 2009/10, which was published in June 2010.b. The Committee reviewed the monthly internal audit reports. The internal audit function is carried out by M/s. Ernst& Young Advisory Services (Pvt) Ltd. The Internal audits are done on a monthly process based audits to improveprocess performance and control. The Monthly Internal Audit reports are reviewed thoroughly and all high riskobservations are deliberated and recommendations are made for rectification.The independent internal audit function has enhanced the value chain of the Company by identifying risk areas andgiving business led solutions.c. The Committee reviewed the external auditors’ report and management letter for the year 2009/10. Allrecommendations proposed by the external auditors were discussed with the senior partner and recommendationswere duly carried out by the management.Lanka Floortiles PLC Annual Report 2010 - 11

Audit Committee Report Contd.46d. The Audit Committee in conjunction with the Managing Director and Head of Finance of the Company, reviewed theCompany’s disclosure controls and procedures and internal control over financial reporting.e. The Audit Committee reviewed the Company’s policies and practices with respect to risk assessment and riskmanagement, including discussing with management the Company’s major financial risk exposures and the stepsthat have been taken to monitor and control such exposures.f. The Audit Committee reported to the Board periodically. This report included a review of any issues that arisewith respect to the quality or integrity of the Company’s financial statements, the Company’s compliance withlegal or regulatory requirements, the independence and performance of the Company’s independent auditor, theperformance of the internal audit function and any other matters that the Audit Committee deems appropriate or isrequested to be included by the Board.ConclusionThe Audit Committee is satisfied that the Company’s accounting policies and risk management are adequate for theCompany and the accomplishment of details and functions that is delegated to the Audit Committee by the Board.A A PageChairman – Audit Committee05th July 2011.Lanka Floortiles PLC Annual Report 2010 - 11

Independent Auditor’s Report to theshareholders of Lanka Floortiles PLC47Report on the Financial StatementsWe have audited the accompanying financial statements of Lanka Floortiles PLC (“the Company”), the consolidatedfinancial statements of the Company and its subsidiaries, which comprise the balance sheet as at 31st March 2011, andthe income statement, statement of changes in equity and cash flow statement for the year then ended, and a summaryof significant accounting policies and other explanatory notes as set out on pages 48 to 75.Management’s Responsibility for the Financial StatementsManagement is responsible for the preparation and fair presentation of these financial statements in accordance withSri Lanka Accounting Standards. This responsibility includes: designing, implementing and maintaining internal controlrelevant to the preparation and fair presentation of financial statements that are free from material misstatement,whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimatesthat 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 auditin accordance with Sri Lanka Auditing Standards. Those Standards require that we plan and perform the audit to obtainreasonable assurance whether the financial statements are free from material misstatement.An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We have obtained all the information and explanations which to the best of our knowledge and belief were necessaryfor the purposes of our audit. We therefore believe that our audit provides a reasonable basis for our opinion.OpinionIn our opinion, so far as appears from our examination, the Company maintained proper accounting records for the yearended 31st March 2011 and the financial statements give a true and fair view of the Company’s state of affairs as at 31stMarch 2011 and of its profit and cash flows for the year then ended in accordance with Sri Lanka Accounting Standards.In our opinion, the consolidated financial statements give a true and fair view of the state of affairs as at 31st March2011 and the profit and cash flows for the year then ended, in accordance with Sri Lanka Accounting Standards, of theCompany and its subsidiaries dealt with thereby, so far as concerns the shareholders of the Company.Report on Other Legal and Regulatory RequirementsThese financial statements also comply with the requirements of Sections 151 (2) and 153 (2) to 153 (7) of theCompanies Act No. 07 of 2007.05th July 2011ColomboPricewaterhouseCoopersChartered AccountantsLanka Floortiles PLC Annual Report 2010 - 11

Balance Sheet48GroupCompanyAs at 31st March 2011 2010 2011 2010Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000NotesRestatedASSETSNon-current assetsProperty, plant and equipment 5 1,535,472 1,329,845 1,494,858 1,284,213Capital work-in-progress 6 85,071 140,022 85,071 140,022Intangible assets 7 301 301 - -Investments in subsidiaries 8 - - 168,254 168,254Investments in associate 9 251,231 128,302 171,013 53,2471,872,075 1,598,470 1,919,196 1,645,736Current assetsInventories 10 581,768 562,739 569,821 546,040Trade and other receivables 11 502,144 558,431 498,403 555,442Cash and cash equivalents 12 156,888 145,672 154,414 142,9861,240,800 1,266,842 1,222,638 1,244,468Total assets 3,112,875 2,865,312 3,141,834 2,890,204EQUITYCapital and reservesStated capital 13 900,968 429,456 900,968 429,456Reserves 1,312,307 1,569,650 776,165 1,040,3242,213,275 1,999,106 1,677,133 1,469,780LIABILITIESNon-current liabilitiesBorrowings 15 81,093 184,101 81,093 184,101Deferred income tax liabilities 16 126,776 106,448 116,372 94,523Retirement benefit obligations 17 45,129 41,715 42,119 39,186252,998 332,264 239,584 317,810Current liabilitiesTrade and other payables 14 462,858 346,331 1,042,524 914,756Current income tax liabilities 96,059 39,899 94,928 40,223Borrowings 15 87,685 147,712 87,665 147,635646,602 533,942 1,225,117 1,102,614Total liabilities 899,600 866,206 1,464,701 1,420,424Total equity and liabilities 3,112,875 2,865,312 3,141,834 2,890,204The Board of Directors is responsible for the preparation andpresentation of these financial statements. These financialstatements were approved for issue by the Board of Directors on05th July 2011.I certify that these financial statements have beenprepared in compliance with the requirements ofthe Companies Act, No. 07 of 2007.A A Page J A P M Jayasekera B T T RocheChairman Managing Director Head of FinanceThe notes on pages 52 to 75 form an integral part of these financial statements.Lanka Floortiles PLC Annual Report 2010 - 11

Income Statement49GroupCompanyYear ended 31st March 2011 2010 2011 2010Notes Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Gross revenue 18 3,021,729 2,852,211 3,002,984 2,827,639Revenue (net of taxes) 18 3,020,782 2,851,206 3,002,191 2,826,880Cost of sales (1,947,955) (1,985,242) (1,931,791) (1,959,079)Gross profit 1,072,827 865,964 1,070,400 867,801Other operating income 19,177 12,623 18,476 13,579Distribution costs (153,107) (138,020) (152,770) (137,677)Administrative expenses (230,299) (199,567) (229,842) (198,913)Operating profit 19 708,598 541,000 706,264 544,790Finance costs - net 21 (3,654) (42,750) (3,648) (42,749)Share of results of associate 9 5,163 (8,591) - -Profit before income tax 710,107 489,659 702,616 502,041Income tax expense 22 (198,221) (110,571) (197,546) (109,524)Profit for the year 511,886 379,088 505,070 392,517Basic earnings per share (Rs.) 23 9.65 7.15 9.52 7.40The notes on pages 52 to 75 form an integral part of these financial statements.Figures in brackets indicate deductions.Lanka Floortiles PLC Annual Report 2010 - 11

50Statement of Changes in EquityGroupReservesStated Revaluation Retained Total Shareholders’capital reserve earnings Reserves fundsNotes Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Balance at 1st April 2009 429,456 20,614 1,208,946 1,229,560 1,659,016Net profit - - 379,088 379,088 379,088Adjustment for revaluation portionin associate 9 (b) - 81,957 - 81,957 81,957Dividends for 2008/2009 (Final) 24 - - (67,905) (67,905) (67,905)Dividends for 2009/2010 (Interim) 24 - - (53,050) (53,050) (53,050)Balance at 31st March 2010 429,456 102,571 1,467,079 1,569,650 1,999,106Balance at 1st April 2010As previously reported 429,456 20,614 1,467,079 1,487,693 1,917,149Adjustment for revaluationportion in associate 9 (b) - 81,957 - 81,957 81,957As restated 429,456 102,571 1,467,079 1,569,650 1,999,106Reserve capitalization 471,512 - (471,512) (471,512) -Expenses on reserve capitalisation - - (5,940) (5,940) (5,940)Net profit - - 511,886 511,886 511,886Dividends for 2009/2010 (2nd Interim) 24 - - (106,101) (106,101) (106,101)Dividends for 2010/2011 (1st Interim) 24 - - (53,050) (53,050) (53,050)Dividends for 2010/2011 (2nd Interim) 24 - - (132,626) (132,626) (132,626)Balance at 31st March 2011 900,968 102,571 1,209,736 1,312,307 2,213,275Company Stated Retained Shareholders’capital earnings fundsNotes Rs. ‘000 Rs. ‘000 Rs. ‘000Balance at 1st April 2009 429,456 768,762 1,198,218Net profit - 392,517 392,517Dividends for 2008/2009 (Final) - (67,905) (67,905)Dividends for 2009/2010 (Interim) 24 - (53,050) (53,050)Balance at 31st March 2010 429,456 1,040,324 1,469,780Balance at 1st April 2010 429,456 1,040,324 1,469,780Reserve capitalisation 471,512 (471,512) -Expenses on reserve capitalisation - (5,940) (5,940)Net profit - 505,070 505,070Dividends for 2009/2010 (2nd Interim) 24 - (106,101) (106,101)Dividends for 2010/2011 (1st Interim) 24 - (53,050) (53,050)Dividends for 2010/2011 (2nd Interim) - (132,626) (132,626)Balance at 31st March 2011 900,968 776,165 1,677,133The notes on pages 52 to 75 form an integral part of these financial statements.Lanka Floortiles PLC Annual Report 2010 - 11

51Cash Flow StatementGroupCompanyYear ended 31st March 2011 2010 2011 2010Notes Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Cash flows from operating activitiesCash generated from operations 25 897,677 860,147 897,782 859,643Interest paid 21 (24,300) (65,867) (24,298) (65,866)Interest received 21 6,709 10,273 6,709 10,273Gratuity paid 17 (1,373) (3,195) (1,212) (2,957)Tax paid (120,789) (91,130) (120,049) (90,060)Net cash generated from operating activities 757,924 710,228 758,932 711,033Cash flows from investing activitiesPurchase of property, plant and equipment (148,862) (73,204) (148,862) (73,204)Proceeds from sale of property, plant andequipment 5,078 359 4,224 359Purchase of shares in associate (117,766) (30,000) (117,766) (30,000)Proceeds from sale of shares in associate - 5,667 - 5,667Expenditure incurred on capital work-in-progress 6 (143,330) (91,935) (143,330) (91,935)Net cash used in investing activities (404,880) (189,113) (405,734) (189,113)Cash flows from financing activitiesExpenses on reserve capitalization (5,940) - (5,940) -Dividends paid (159,151) (120,955) (159,151) (120,955)Repayment of finance leases (4,849) (4,325) (4,849) (4,325)Proceeds from borrowings 66,000 90,669 66,000 90,669Repayment of borrowings (252,500) (195,806) (252,500) (195,806)Net cash used in financing activities (356,440) (230,417) (356,440) (230,417)Net (decrease) / increase in cash andcash equivalents (3,396) 290,698 (3,242) 291,503Movement in cash and cash equivalentsAt beginning of year 136,992 (153,706) 134,384 (157,119)(Decrease) / increase (3,396) 290,698 (3,242) 291,503At the end of the year 12 133,596 136,992 131,142 134,384The notes on pages 52 to 75 form an integral part of these financial statements.Lanka Floortiles PLC Annual Report 2010 - 11

52Notes to the Financial Statements1. General informationThe Company is a limited liability company incorporated and domiciled in Sri Lanka. The address of its registered officeis 215, Nawala Road, Narahenpita, Colombo 5. Lanka Floortiles PLC (“the Company”) and its subsidiaries (together “theGroup”) manufactures and sells glazed ceramic floor tiles through a network of dealers and distributors. The Group hasits manufacturing plant located at St James Estate, Jaltara, Ranala. The Company has its primary listing on the ColomboStock Exchange.2. Summary of significant accounting policiesThe principal accounting policies adopted in the preparation of these consolidated financial statements are set outbelow:2.1. Basis of preparationThe consolidated financial statements are prepared in accordance with and comply with the Sri Lanka AccountingStandards. The consolidated financial statements are prepared under the historical cost convention.2.2. Consolidation(a) SubsidiariesSubsidiaries are all entities (including special purpose entities) over which the Group has the power to govern thefinancial and operating policies generally accompanying a shareholding of more than one half of the voting rights.The existence and effect of potential voting rights that are currently exercisable or convertible are considered whenassessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which controlis transferred to the Group. They are de-consolidated from the date that control ceases.The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of anacquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumedat the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities andcontingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date,irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’sshare of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair valueof the net assets of the subsidiary acquired, the difference is recognised directly in the income statement (see also Note2.6).Inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated.Unrealised losses are also eliminated but considered an impairment indicator of the asset transferred. Accountingpolicies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by theGroup.A listing of the Group’s principal subsidiaries is set out in Note 8.(b) AssociatesAssociates are all entities over which the Group has significant influence but not control, generally accompanying ashareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using theequity method of accounting and are initially recognised at cost. The Group’s investment in associates includes goodwillidentified on acquisition, net of any accumulated impairment loss (see also Note 2.7).The Group’s share of its associates’ post-acquisition profits or losses is recognised in the income statement, and itsshare of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movementsare adjusted against the carrying amount of the investment. When the Group’s share of losses in an associate equals orexceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise furtherlosses, unless it has incurred obligations or made payments on behalf of the associate.Lanka Floortiles PLC Annual Report 2010 - 11

53Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’sinterest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of animpairment of the asset transferred.Particulars of the Group’s associate undertaking are set out in Note 9.2.3 Segment ReportingA business segment is a group of assets and operations engaged in providing products or services that are subject torisks and returns that are different from those of other business segments.2.4 Foreign currenciesForeign currency transactions in Group companies are accounted for at the exchange rates prevailing at the date of thetransactions: gains and losses resulting from the settlement of such transactions and from the translation of monetaryassets and liabilities denominated in foreign currencies, are recognized in the income statement. Such balances aretranslated at year-end exchange rates unless hedged by forward foreign exchange contracts, in which case the ratesspecified in such forward contracts are used.2.5 Property, plant and equipment(a) CostAll property, plant and equipment is initially recorded at cost and stated at historical cost less depreciation. Historicalcost includes expenditure that is directly attributable to the acquisition of the items and also includes the initial estimateof the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for whichan entity incurs either when the item is acquired or as a consequence of having used the item during a particular periodfor purposes other than to produce inventories during that period.(b) DepreciationLand is not depreciated as it is deemed to have an indefinite life. Depreciation on other assets is calculated using thestraight-line method to allocate their cost or revalued amounts to their residual values over their estimated useful livesof such assets.Depreciation begins when an item of property, plant and equipment is available for use and will continue until it isderecognised, even if during that period the item is idle.The principal annual depreciation rates and amortization method used are:Clay mining landBuildingsPlant and machineryFurniture and fittings, office equipmentTools and implementsElectricity distribution scheme and water supply schemeMotor vehiclesUnits of production basis50 years12 years5 years2 years10 years5 yearsThe assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediatelyto its recoverable amount.(c) Borrowing costsBorrowing costs are written off to the income statement as incurred, unless they relate to borrowings which fundsignificant capital projects, in which case they are capitalized with the relevant property, plant and equipment up toLanka Floortiles PLC Annual Report 2010 - 11

54Notes to the financial statements Contd.the date of commercial operation, and written off to the income statement over the period during which the asset isdepreciated. Borrowing costs include interest charged, commitment fees, guarantee premium and exchange differenceson foreign loans to the extent that they are regarded as an adjustment to interest costs.(d) Gains and losses on disposal of property, plant and equipment are determined by comparing proceeds withcarrying amount. They are included in the income statement in determining the operating profit.2.6 Intangible assetsGoodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the netidentifiable assets of the acquired subsidiary at the date of acquisition. Goodwill on acquisitions of subsidiaries isincluded in intangible assets. Goodwill acquired in a business combination is tested annually for impairment, or morefrequently if events or changes in circumstance indicate that it might be impaired; and carried at costs less accumulatedimpairment losses. Impairment losses on goodwill are not reversed.2.7 Impairment of non-current assetsAssets that have an indefinite useful life, are not subject to amortization and are tested annually for impairment. Assetsthat are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’scarrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value lesscosts to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels forwhich there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill thatsuffered an impairment are reviewed for possible reversal of the impairment at each reporting date.2.8 Accounting for leases where a group company is the lesseeLeases of assets under which all the risks and benefits of ownership are effectively retained by the lessor are classified asoperating leases. Payments made under operating leases are charged to the income statement on a straight line basisover the period of the leases.When an operating lease is terminated before the lease period is expired, any payment required to be made to thelessor by way of penalty is recognized as expense in the period in which termination takes place.Leases of property, plant and equipment where the Group assumes substantially all the benefits and risks of ownershipare classified as finance leases. Finance leases are capitalised at the estimated present value of the underlying leasepayment. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate onthe finance balance outstanding. The corresponding rental obligations, net of finance charges, are included in otherlong-term payables. The interest element of the finance charge is charged to the income statement over the leaseperiod. The property, plant and equipment acquired under finance leasing contracts is depreciated over the useful lifeof the asset.2.9 InventoriesInventories are stated at the lower of cost or net realizable value. The raw material cost is determined by the weightedaverage method. The cost of finished goods and work-in-progress comprises raw materials, direct labour, other directcosts and related production overheads, but excludes interest expense. Net realizable value is the estimate of theselling price in the ordinary course of business less the costs of completion and selling expenses. Provision is made,where necessary, for obsolete, slow moving and defective inventories.2.10 Trade receivablesTrade receivables are recognized at the amounts that they are estimated to realise less provision for impairment. Aprovision for impairment of trade receivables is established when there is objective evidence that the Group and theCompany will not be able to collect all amounts due according to the original terms of receivables. Significant financialdifficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, and default orLanka Floortiles PLC Annual Report 2010 - 11

55delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the provisionis the difference between the asset’s carrying amount and the estimated realisable value. The amount of the provisionis recognized in the income statement within administration costs. When a trade receivable is uncollectible, it is writtenoff against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off arecredited in the income statement.2.11 Cash and cash equivalentsCash and cash equivalents include cash in hand, deposits held at call with banks, other short-term highly liquidinvestments with original maturities of three month or less , and bank overdrafts. Bank overdraft are shown withinborrowings in current liabilities on the balance sheet.2.12 Trade and other payablesLiabilities classified as trade and other payables in the balance sheet are those which fall due for payment on demand orwithin one year from the balance sheet date.2.13 BorrowingsBorrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of theliability for at least 12 months after the balance sheet date.2.14 Current and deferred income taxesThe tax expense for the year comprises current and deferred tax. Tax is recognized in the income statement, exceptto the extent that it related to items recognized directly in equity. In this case, the tax is also recognized in equity .Thecurrent income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balancesheet date. Management periodically evaluates positions taken in tax returns with respect to situations in whichapplicable tax regulations is subject to interpretation and establishes provisions where appropriate on the basis ofamounts expected to be paid to the tax authorities.Deferred income tax is provided in full, using the liability method, on temporary differences arising between the taxbases of assets and liabilities and their carrying amounts in the financial statements. However, deferred income taxis not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a businesscombination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred incometax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet dateand are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability issettled. Currently the Company is entitled to concessionary rates on the profits generated as explained in Note 22 tothe financial statements.Deferred income tax assets are recognized to the extent that it is probable that future taxable profit will be availableagainst which the temporary differences can be utilized.2.15 Employee benefits(a) Defined benefit plan - GratuityA defined benefit plan is a pension plan that is not defined contribution plan. Defined benefit plans define an amountof pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age,years of service and compensation.The liability recognized in the balance sheet in respect of defined benefit plan is the present value of the definedbenefit obligation at the balance sheet date together with adjustments for unrecognized past-service costs. The definedbenefit obligation is calculated annually by independent actuaries using the projected unit credit method. The presentvalue of the defined benefit obligation is determined by discounting the estimated future cash outflows using interestrates of long term Government Bonds or high quality corporate bonds.Lanka Floortiles PLC Annual Report 2010 - 11

56Notes to the financial statements Contd.Past-service costs are recognized immediately in income, unless the changes to the defined benefit plan are conditionalon the employees remaining in service for a specified period of time (the vesting period). In this case, the past-servicecosts are amortized on a straight-line basis over the vesting period.As a policy the Group and the Company adopts the Corridor Method in recognising the actuarial gains and losses.Accordingly, the Group and the Company recognises in the income statement a specified portion of the net cumulativeactuarial gains and losses that exceed the greater of:iii10% of the present value of the defined benefit obligation (before deducting plan assets); and10% of the fair value of any plan assets.The assumptions based on which the results of the actuarial valuation was determined, are included in Note 17 to thefinancial statements.(b) Defined contribution plansFor defined contribution plans, such as the Employees’ Provident Fund and Employees’ Trust Fund, the Companycontributes 12% and 3% respectively, of the employees’ basic or consolidated wage or salary. The Group has no furtherpayment obligations once the contributions have been paid. The Company and the employees are members of thesedefined contribution plans.2.16 ProvisionsThe Group recognizes provisions when it has a present legal or constructive obligation arising as a result of a past event,and it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimatecan be made. The recording of provisions requires the application of judgments about the ultimate resolution of theseobligations. As a result, provisions are reviewed at each balance sheet date and adjusted to reflect the Group’s currentbest estimate.2.17 Revenue recognitionSales are recognized upon delivery of products and customer acceptance, if any, net of sales taxes and discounts, andafter eliminating sales within the Group.Other revenues earned by the Group are recognized on the following bases:Interest income - as it accrues (taking into account the effective yield on the asset) unless collectability is in doubt.Dividend income - when the shareholder’s right to receive payment is established.2.18 Dividend distributionDividend distribution to the Company’s shareholders is recognized as a liability in the Group’s financial statements in theperiod in which the dividends are approved by the Company’s shareholders.3. Business entityThe Company has regular transactions with its subsidiary companies. Further, certain administrative and establishmentcosts are shared among group companies.All these transactions are reflected in the financial statements on bases mutually agreed between the parties.Lanka Floortiles PLC Annual Report 2010 - 11

574. Segment informationPrimary reporting format - business segmentsAt 31st March 2011 the Group is organised into two main business segments :Revenue from local salesRevenue from export salesThe segment results for the year ended 31st March 2011 are as follows:Local Export GroupSales SalesRs. ‘000 Rs. ‘000 Rs. ‘000Total segmental revenue 2,860,244 161,485 3,021,729Revenue from external customers 2,860,244 161,485 3,021,729Operating profit / segment results 708,598Finance income 20,646Finance costs (24,300)Finance costs - net (Note 21) (3,654)Share of results of associate 5,163Profit before income tax 710,107Income tax expense (Note 22) (198,221)Profit for the year 511,886The segment results for the year ended 31st March 2010 are as follows:Local Export GroupSales SalesRs. ‘000 Rs. ‘000 Rs. ‘000Total segmental revenue 2,636,360 215,851 2,852,211Revenue from external customers 2,636,360 215,851 2,852,211Operating profit / segment results 541,000Finance income 23,117Finance costs (65,867)Finance costs - net (Note 21) (42,750)Share of results of associate (8,591)Profit before income tax 489,659Income tax expense (Note 22) (110,571)Profit for the year 379,088Lanka Floortiles PLC Annual Report 2010 - 11

58Notes to the financial statements Contd.5. Property, plant and equipment(a) GroupFurnitureFreehold fittingsand equipment Water Electricityclay mining Freehold Plant & & electrical Tools & supply distribution Motorland buildings machinery appliances implements scheme scheme vehicles Roadway TotalRs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Year ended 31st March 2010Opening net book amount 79,170 248,480 897,657 41,996 751 2,392 74,661 22,523 8,734 1,376,364Additions 35 - 63,866 8,975 - - 192 1,836 - 74,904Transfers from CWIP (Note 6) - 12,777 10,148 1,357 - - 176 - 122 24,580Cost of disposals - - - (253) - - - (369) - (622)Depreciation on disposals - - - 8 - - - 369 - 377Depreciation charge (Note 19) (1,462) (5,945) (106,064) (13,179) (284) (574) (10,529) (7,492) (229) (145,758)Closing net book amount 77,743 255,312 865,607 38,904 467 1,818 64,500 16,867 8,627 1,329,845At 31st March 2010Cost 81,472 304,515 1,584,205 110,937 15,343 13,409 123,762 47,679 10,284 2,291,606Accumulated depreciation (3,729) (49,203) (718,598) (72,033) (14,876) (11,591) (59,262) (30,812) (1,657) (961,761)Net book amount 77,743 255,312 865,607 38,904 467 1,818 64,500 16,867 8,627 1,329,845Year ended 31st March 2011Opening net book amount 77,743 255,312 865,607 38,904 467 1,818 64,500 16,867 8,627 1,329,845Additions 48,579 200 60,770 20,550 - - 9,495 22,968 - 162,562Transfers from CWIP (Note 6) - 174,831 10,322 331 - 2,156 10,641 - - 198,281Cost of disposals - - (11,761) (13) - - (162) - (11,936)Depreciation on disposals - - 9,998 13 - - - 157 - 10,168Depreciation charge (Note 19) (1) (8,154) (111,038) (15,095) (7) (642) (11,460) (6,845) (206) (153,448)Closing net book amount 126,321 422,189 823,898 44,690 460 3,332 73,176 32,985 8,421 1,535,472At 31st March 2011Cost 130,051 479,546 1,643,536 131,805 15,343 15,565 143,898 70,485 10,284 2,640,513Accumulated depreciation (3,730) (57,357) (819,638) (87,115) (14,883) (12,233) (70,722) (37,500) (1,863) (1,105,041)Net book amount 126,321 422,189 823,898 44,690 460 3,332 73,176 32,985 8,421 1,535,472Lanka Floortiles PLC Annual Report 2010 - 11

595. Property, plant and equipment (Contd.)(b) CompanyFurnitureFreehold fittingsand equipment Water Electricityclay mining Freehold Plant & & electrical Tools & supply distribution Motorland buildings machinery appliances implements scheme scheme vehicles Roadway TotalRs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Year ended 31st March 2010Opening net book amount 79,170 211,497 884,708 41,996 751 1,969 74,109 22,523 8,760 1,325,483Additions 35 - 63,866 8,975 - - 192 1,836 - 74,904Transfers from CWIP (Note 6) - 12,777 10,148 1,357 - - 176 - 122 24,580Cost of disposals - - - (253) - - - (369) - (622)Depreciation on disposals - - - 8 - - - 369 - 377Depreciation charge (Note 19) (1,462) (4,964) (102,314) (13,179) (284) (363) (10,247) (7,492) (204) (140,509)Closing net book amount 77,743 219,310 856,408 38,904 467 1,606 64,230 16,867 8,678 1,284,213At 31st March 2010Cost 81,472 254,201 1,377,079 108,564 14,206 4,780 108,399 46,193 10,284 2,005,178Accumulated depreciation (3,729) (34,891) (520,671) (69,660) (13,739) (3,174) (44,169) (29,326) (1,606) (720,965)Net book amount 77,743 219,310 856,408 38,904 467 1,606 64,230 16,867 8,678 1,284,213Year ended 31st March 2011Opening net book amount 77,743 219,310 856,408 38,904 467 1,606 64,230 16,867 8,678 1,284,213Additions 48,579 200 60,770 20,550 - - 9,495 22,968 - 162,562Transfers from CWIP (Note 6) - 174,831 10,322 331 - 2,156 10,641 - - 198,281Cost of disposals - - (2,506) (13) - - - (10) - (2,529)Depreciation on disposals - - 743 13 - - - 5 - 761Depreciation charge (Note 19) (1) (7,148) (107,375) (15,095) (7) (431) (11,322) (6,845) (206) (148,430)Closing net book amount 126,321 387,193 818,362 44,690 460 3,331 73,044 32,985 8,472 1,494,858At 31st March 2011Cost 130,051 429,232 1,445,665 129,432 14,206 6,936 128,535 69,151 10,284 2,363,492Accumulated depreciation (3,730) (42,039) (627,303) (84,742) (13,746) (3,605) (55,491) (36,166) (1,812) (868,634)Net book amount 126,321 387,193 818,362 44,690 460 3,331 73,044 32,985 8,472 1,494,858Lanka Floortiles PLC Annual Report 2010 - 11

60Notes to the financial statements Contd.5. Property, plant and equipment Contd.(c)Property, plant and equipment of the Group and the Company include fully depreciated assets in use at 31st March2011, the cost of which amounted to the Company Rs. 200,475,865/- (2010 - Rs. 197,498,985/-), the Group Rs.403,413,727/- (2010 - Rs. 393,817,158/-).(d)The factory of a subsidiary company [Ceradec (Private) Limited] has been constructed on land belonging to LankaFloortiles PLC, for which no rent is being paid.Company(e) The bank borrowings are secured on freehold land, freehold building and plant and machinery. The values of assetssecured is given in Note 15 to the financial statements.(f)(g)The market value of freehold and clay mining land is Rs. 568,114,651/-, as per the valuation carried out by theindependent professional valuer, Ranjan J Samarakone, as at 31st March 2010. Management is of the view that nosignificant change in the Market value of Land have taken place as at 31st March 2011. The market value of freeholdland purchased during the year has a valuation of Rs. 88,425,000/- as per the valuation carried out by the samevaluer, as at 16th June 2011.Property, plant and equipment includes motor vehicles acquired under finance leases, the net book value of which ismade up as follows:GroupCompany2011 2010 2011 2010Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Cost 35,850 22,150 35,850 22,150Accumulated depreciation (2,965) (1,586) (2,965) (1,586)Net book amount 32,885 20,564 32,885 20,5646. Capital work-in-progressGroupCompanyYear ended 31st March 2011 2010 2011 2010Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000At 1st April 140,022 72,667 140,022 72,667Costs incurred during the year 143,330 91,935 143,330 91,935Work completed and transferred torespective property, plant andequipment (Note 5) (198,281) (24,580) (198,281) (24,580)At 31st March 85,071 140,022 85,071 140,022(a)(b)Capital work-in-progress at the balance sheet date includes the purchase cost and installation cost of machinery tobe used in the Company’s production plant at Jaltara, Ranala.Borrowing costs of Rs. Nil (2010 - Rs. 8,223,831/- arising on the loans obtained from Commercial Bank of Ceylon PLCto meet the cost of the warehouse construction were capitalised during the year 2010 and included under “ Costincurred during the year”. A capitalisation rate of 14.49 was used, representing the borrowing cost).Lanka Floortiles PLC Annual Report 2010 - 11

617. Intangible assetGroupAs at 31st March 2011 2011 2010Rs. ‘000 Rs. ‘000Cost 301 301Accumulated amortization - -Net book amount 301 301Intangible asset solely consists of goodwill arising from the acquisition of the minority shareholding in Ceradec (Private)Limited. In compliance with SLAS 25 (revised), the Group has discontinued the amortisation of goodwill from 1st April2006.8. Investments in subsidiariesDetails of those companies in which the Company held more than 50% interest, are set out below:Name of companyProportion of nominalvalue of ordinary sharesheldCeradec (Private) Limited 99.9%Lanka Tiles Trading (Private) Limited 99.9%Description of businessRenting out the company’s productionfacility to Lanka Floortiles PLC on leaseterms.Purchase and sale of wall tiles and parquetwooden flooring.9. Investment in associateGroupCompanyYear ended 31st March Number of 2011 2010 2011 2010shares Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000RestatedOpening net book amount 2,687,472 128,302 29,562 53,247 27,873Share of revaluation of landand building in associate - - 81,957 - -Purchase of shares in associate 10,851,108 117,766 30,000 117,766 30,000Disposal of shares (453,400) - (4,626) - (4,626)Share of results of associate - 5,163 (8,591) - -Closing net book amount 13,085,180 251,231 128,302 171,013 53,247(a)(b)The Company holds 47.8% (2010 - 47.8%) ownership interest in Parquet (Ceylon) PLC [PCP] as at the balance sheetdate and hence PCP is treated as an associate company. The principal activities of PCP are manufacturing and sellingof Tile Grout and Tile Mortar. PCP manufactures Tile Grout and Tile Mortar using the machineries leased out from theCompany.The land and buildings of PCP in Belummahara, Imbulgoda was revalued on 31st March 2010 at Rs. 171,459,000/- byan independent valuer. Accordingly, the Company’s proportionate interest in PCP arising from the revaluation surplusof land and buildings amounting to Rs. 81,957,402/- which was not recognized in the previous year has now beenrecognised and restated as a prior year adjustment to reflect in the carrying amount of the investment in PCP and isrecognised directly in the equity of the Group financial statements.Lanka Floortiles PLC Annual Report 2010 - 11

62Notes to the financial statements Contd.(c) The market value of quoted associate investment as at the balance sheet date was Rs. 276,097,298/-(2010 - Rs. 96,830,332/-).10. InventoriesGroupCompanyAs at 31st March 2011 2011 2010 2011 2010Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Raw materials and consumables 434,544 352,014 411,409 346,213Work-in-progress 55,201 42,132 55,201 42,132Finished goods 189,853 259,119 189,853 235,911679,598 653,265 656,463 624,256Impairment provision for slow moving andobsolete stocks (97,792) (89,931) (86,642) (78,216)Proportionate interest of the unrealized profit onPCP inventories held by Lanka Floortiles PLC &Lanka Tiles Trading (Private) Limited (LTTL) (38) (595) - -581,768 562,739 569,821 546,040Glaze material amounting to Rs. 50,000,000/- and body material amounting to Rs. 25,000,000/- have been pledged assecurity for bank overdraft.11. Trade and other receivablesGroupCompanyAs at 31st March 2011 2011 2010 2011 2010Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Trade receivables 263,053 303,695 262,944 303,578Prepayments and deposits 85,112 41,632 85,070 41,594Receivables from group companies [Note 28 (l)] 105,780 163,905 105,148 163,270Receivables from parent company [Note 28 (I)] 39,108 40,925 36,620 39,187Other receivables 9,091 8,274 8,621 7,813502,144 558,431 498,403 555,44212. Cash and cash equivalentsGroupCompanyAs at 31st March 2011 2011 2010 2011 2010Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Cash at bank and in hand 127,657 145,504 125,183 142,818Short term bank deposits 29,231 168 29,231 168156,888 145,672 154,414 142,986Lanka Floortiles PLC Annual Report 2010 - 11

6312. Cash and cash equivalents Contd.For the purpose of the cash flow statement, the year end cash and cash equivalents comprise the following:GroupCompanyAs at 31st March 2011 2011 2010 2011 2010Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Cash at bank and in hand 127,657 145,504 125,183 142,818Short term bank deposits 29,231 168 29,231 168Bank overdrafts (Note 15) (23,292) (8,680) (23,272) (8,602)133,596 136,992 131,142 134,38413. Stated capitalGroup and CompanyStatedNumber of capitalshares Rs. ‘000At 31st March 2010 42,440,328 429,456At 01st April 2010 42,440,328 429,456Shares from reserve capitalization 10,610,082 471,512At 31st March 2011 53,050,410 900,968(a)(b)Pursuant to the new Companies Act No. 07 of 2007 which became effective from 3rd May 2007, the value of statedcapital consists of ordinary shares and share premium.Pursuant to a resolution adopted by the Shareholders, the Company issued ordinary shares by way of capitalizationof revenue reserves. Accordingly, 10,610,082 ordinary shares were issued and distributed as fully paid ordinary sharesamong the shareholders as at the end of trading on 24th September 2010 in the proportion of one (1) new ordinaryshare for every four (4) existing ordinary shares held as at the said date.14. Trade and other payablesGroupCompanyAs at 31st March 2011 2011 2010 2011 2010Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Trade payables 129,324 122,237 129,324 122,219Payables to group companies [Note 28 (l)] 4,032 73,127 590,748 648,237Accrued expenses 149,980 106,462 145,672 102,348Other payables 46,896 44,505 44,154 41,952Dividend payable 132,626 - 132,626 -462,858 346,331 1,042,524 914,756Other payables of the Group and the Company mainly consists of Value Added Tax payable amounting toRs. 18,393,926/- (2010 - Rs. 20,387,359/-), cash sales advance amounting to Rs. 2,976,964/- (2010 - Rs. 2,383,270/-) andRs. 2,004,670/- (2010 - Rs. 1,580,241/-) respectively and Nations Building Tax payable amounting to Rs. 3,006,052/-(2010 - Rs. 6,496,442/-).Lanka Floortiles PLC Annual Report 2010 - 11

64Notes to the financial statements Contd.15. BorrowingsGroupCompanyAs at 31st March 2011 2011 2010 2011 2010Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000CurrentBank borrowings 55,810 134,247 55,810 134,247Bank overdraft 23,292 8,680 23,272 8,602Finance lease liabilities 8,583 4,785 8,583 4,78687,685 147,712 87,665 147,635Non-currentBank borrowings 68,091 176,153 68,091 176,153Finance lease liabilities 13,002 7,948 13,002 7,94881,093 184,101 81,093 184,101Total borrowings 168,778 331,813 168,758 331,736(a)(b)Bank overdrafts at Bank of Ceylon and Citi Bank are secured primarily on inventories.Details of all bank borrowings outstanding at the balance sheet date are set out below:Loan Principal AmountoutstandingRepayment termsCommencementof repaymentDFCC 175,000 69,270 48 equal monthly instalments after a graceperiod of 12 months from the day of firstdisbursement.November 2008COMM 22,243 18,533 59 equal monthly instalments after a graceperiod of 6 months from the day of firstdisbursement.May 2010HNB 38,000 36,098 59 equal monthly installments from the day offirst disbursement.123,901January 2011(c)The security offered and the interest rate applicable to each bank borrowings are set out below:Loan Security offered Interest rateper annum (%)DFCCA primary mortgage over land, building andplant and machinery of Lanka Floortiles PLC atRanala amounting to Rs. 113.021 Mn.HNB Primary floating mortgage bond for Rs. 27Mn. over the Sorting line imported.*AWDR + 3%**AWPLR -0.75%*AWDR - Average Weighted Deposit Rate**AWPLR - Average Weighted Primary Lending RateLanka Floortiles PLC Annual Report 2010 - 11

65(d)Weighted average effective interest rates:Year ended 31st March 2011 2010Bank overdrafts 10.16% 14.83%Bank borrowings 8.71% 14.62%(e)Maturity of non - current borrowingsGroupCompanyAs at 31st March 2011 2011 2010 2011 2010Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Between one and two years 37,581 103,762 37,581 103,762Between two and five years 30,510 72,391 30,510 72,39168,091 176,153 68,091 176,153Lease liabilities are effectively secured as the rights to the leased asset revert to the lessor in the event of default.Finance lease liabilities - minimum lease paymentGroupCompanyYear ended 31st March 2011 2010 2011 2010Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Not later than 1 year 11,808 6,407 11,808 6,407Later than 1 year and not later than 5 years 13,712 8,957 13,712 8,95725,520 15,364 25,520 15,364Future finance charges on finance leases (3,935) (2,630) (3,935) (2,630)Present value of finance lease liabilities 21,585 12,734 21,585 12,734Present value of finance lease liabilities:Not later than 1 year 8,583 4,785 8,583 4,785Later than 1 year and not later than 5 years 13,002 7,949 13,002 7,94921,585 12,734 21,585 12,73416. Deferred income tax liabilities(a) Deferred income taxes are calculated on all temporary differences under the liability method.The movement on the deferred income tax account is as follows:GroupCompanyYear ended 31st March 2011 2010 2011 2010Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000At the beginning of the year 106,448 92,132 94,523 80,554Income statement charge (Note 22) 20,328 14,316 21,849 13,969At the end of the year 126,776 106,448 116,372 94,523Lanka Floortiles PLC Annual Report 2010 - 11

66Notes to the financial statements Contd.16. Deferred income tax liabilities Contd.(b)(c)Deferred tax liability and the deferred tax charge in the income statement are attributable to accelerated taxdepreciation, provision for inventories and defined benefit obligations, to the extent that they are likely to result inan actual liability or an asset in the foreseeable future.Deferred income tax assets and liabilities are offset when the income taxes relate to the same fiscal authority. Thefollowing amounts are shown in the balance sheet:GroupCompanyAs at 31st March 2011 2010 2011 2010Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Deferred tax assets (28,922) (36,373) (25,442) (33,313)Deferred tax liabilities 155,698 142,821 141,814 127,836126,776 106,448 116,372 94,52317. Retirement benefit obligationsGroupCompanyAs at 31st March 2011 2010 2011 2010Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Balance sheet obligations for:Pension benefits (Gratuity) 45,129 41,715 42,119 39,186Income statement charge (Note 20)Pension benefits (Gratuity) 4,787 7,517 4,787 7,517Amounts recognised in the balance sheetare determined as follows:GroupCompanyAs at 31st March 2011 2010 2011 2010Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Present value of unfunded obligations 48,998 45,584 45,763 42,830Unrecognised actuarial losses (3,869) (3,869) (3,644) (3,644)45,129 41,715 42,119 39,186The movement in the defined benefit obligationsover the year is as follows:Beginning of year 41,715 37,393 39,186 35,107Current service cost 1,655 2,572 1,405 2,385Interest cost 3,132 4,945 2,740 4,651Benefit paid (1,373) (3,195) (1,212) (2,957)End of the year 45,129 41,715 42,119 39,186Lanka Floortiles PLC Annual Report 2010 - 11

6717. Retirement benefit obligations Contd.Amounts recognised in the income statement are as follows:GroupCompanyAs at 31st March 2011 2010 2011 2010Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Current service cost 1,655 2,572 1,405 2,385Interest cost 3,132 4,945 2,740 4,651Transferred from Ceradec (Private) Limited - - 642 4814,787 7,517 4,787 7,517The total amounts recognised in the income statements were included in the administration expenses. The portion ofactuarial losses not recognised that fell within the 10% corridor amounted to Rs. 3,643,631/-.This obligation is not externally funded.The gratuity liability of the Company is based on the actuarial valuation (including estimates for the year 2011 and2012) carried out by Messrs Piyal S Goonetilleke & Associates, on 27th March 2010. The principal actuarial valuationassumptions used were as follows:2011 20101. Discount rate 11% 12%2. Future salary increase 8% 8%In additions to above , demographic assumptions such as mortality , withdrawal disability and retirement age wereconsidered for the actuarial valuation. GA 1983 mortality table issued by the society of Actuaries USA was taken as thebase for the valuation.18. RevenueGroupCompanyYear ended 31st March 2011 2010 2011 2010Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Export sales 161,485 215,851 161,485 215,851Local sales with Value Added Tax 3,210,530 2,958,910 3,191,785 2,934,338Less: Value Added Tax (350,286) (322,550) (350,286) (322,550)Local sales - Net of Value Added Tax 2,860,244 2,636,360 2,841,499 2,611,788Total revenue - Net of Value Added Tax 3,021,729 2,852,211 3,002,984 2,827,639Less: Turnover tax (947) (1,005) (793) (759)Revenue (net of taxes) 3,020,782 2,851,206 3,002,191 2,826,880Lanka Floortiles PLC Annual Report 2010 - 11

68Notes to the financial statements Contd.19. Operating profitThe following items have been charged / (credited) in arriving at operating profit:GroupCompanyYear ended 31st March 2011 2010 2011 2010Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Directors’ emoluments- As Directors’ fees 2,450 1,885 2,450 1,885- For managerial services 11,231 9,857 11,231 9,85713,681 11,742 13,681 11,742Auditors’ remuneration- Audit 516 498 381 363- Non-Audit 189 100 103 100- Audit expenses 106 95 77 70811 693 561 533Depreciation on property, plant andequipment (Note 5) 153,448 145,758 148,430 140,509Profit on disposal of property, plant andequipment (3,310) (115) (2,456) (115)Repair and maintenance expenditure 101,946 104,821 101,946 104,821Bad debts written off 958 101 958 101Inventories written off / provisionfor slow moving inventories 7,861 8,117 8,426 8,263Operating lease rental - - 6,000 6,000Staff costs (Note 20) 243,230 202,446 243,230 202,446Social Responsibility Levy 1.50% (2010-1.50%) 2,582 1,542 2,553 1,53220. Staff costsGroupCompanyYear ended 31st March 2011 2010 2011 2010Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Wages, salaries and bonus 219,402 177,077 219,402 177,077Pension costs-defined contribution plans 19,041 17,852 19,041 17,852Pension costs-defined benefit plan (Note 17) 4,787 7,517 4,787 7,517243,230 202,446 243,230 202,446Average monthly number of persons employedduring the year:- Full time 454 488 406 439- Part time 48 50 48 50502 538 454 489Lanka Floortiles PLC Annual Report 2010 - 11

6921. Finance costsGroupCompanyYear ended 31st March 2011 2010 2011 2010Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Interest cost- bank overdrafts 151 10,665 149 10,665- debentures - 3,316 - 3,316- finance leases 1,889 2,325 1,889 2,325- bank loans 22,260 49,561 22,260 49,56124,300 65,867 24,298 65,867Net foreign exchange transaction / translation gains (13,937) (12,844) (13,941) (12,844)Interest income (6,709) (10,273) (6,709) (10,273)(20,646) (23,117) (20,650) (23,117)3,654 42,750 3,648 42,75022. Income tax expenseGroupCompanyYear ended 31st March 2011 2010 2011 2010Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Current tax 174,954 103,709 172,758 103,009Deferred tax charge (Note 16) 20,328 14,316 21,849 13,969Under / (over) provision in respect of previous year 2,939 (7,454) 2,939 (7,454)198,221 110,571 197,546 109,524The tax on the Company’s profit before tax differs from the theoretical amount that would arise using the basic rate oftax applicable to the Company as follows:GroupCompanyYear ended 31st March 2011 2010 2011 2010Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Profit before tax 712,106 489,659 702,616 502,041Tax calculated at a tax rate of 10 %on new projects (2010 - 5%) 30,222 13,007 30,222 13,007Tax calculated at a tax rate of 15 % on export profit 3,194 2,287 3,194 2,287Tax calculated at a tax rate of 35% (2010 - 35%) 134,359 76,146 133,770 79,331Effect of change in tax rate 13,097 14,592 12,439 11,039Income not subject to tax (2,476) (2,969) (2,304) (2,969)Expenses not deductible for tax purposes 16,886 14,963 17,286 14,284Under / (over) provision in respect of previous year 2,939 (7,454) 2,939 (7,454)Tax charge 198,221 110,571 197,546 109,524The Company commenced the operations of its expansion unit with effect from 1st October 2003. Under the InlandRevenue (Amendment) Act No. 19 of 2003 (Section 21 A), the Company is entitled to concessionary rates, in respect ofprofits generated from its expansion unit. This concessionary rates were revised under the Inland Revenue (Amendment)Act No. 9 of 2008 (Section 25).Lanka Floortiles PLC Annual Report 2010 - 11

70Notes to the financial statements Contd.Accordingly, the revised concessionary rates on the profits generated from the expansion unit is given below:Previous RevisedPeriod Tax rates (%) Tax rates (%)First five years 0 0Sixth year 10 5Seventh year 10 10Eighth year NA 15Eighth year onwards- Exports 15 NA- Others 20 NANinth year onwards NA Normal rate23. Earnings per shareBasic earnings per share is calculated by dividing the net profit attributable to shareholders by the weighted averagenumber of shares in issue during the year.GroupCompany2011 2010 2011 2010Amounts used as the numerator (Rs. ‘000)Profit attributable to equity holders of the Company 511,886 379,088 505,070 392,517Amounts used as the denominator (Rs. ‘000)Opening weighted average number ofordinary shares - Restated 53,050 42,440 53,050 42,440Increase in shares outstanding as a result ofreserve capitalization - 10,610 - 10,610Closing weighted average number of ordinary 53,050 53,050 53,050 53,050sharesBasic earnings per share (Rs.) 9.65 * 7.15 9.52 * 7.40* Earnings per share reported for the year ended 31 March 2010 has been restated to reflect the bonus element arisingfrom the capitalization of reserves.24. DividendsA second interim of Rs. 106,100,820/- at Rs. 2.50 per share for the year ended 31st March 2010 (2009 final - Rs.67,904,525/- at Rs. 1.60 per share) was paid on 17th June 2010.A first interim dividend of Rs. 53,050,410/- at Rs. 1.00 per share (2010 - Rs. 53,050,410/- at Rs. 1.25 per share) in respectof the year ended 31st March 2011 was paid on 23rd November 2010.A second interim dividend of Rs. 132,626,025/- at Rs. 2.50 per share for the year ended 31st March 2011 has beenapproved by the Directors on 31st March 2011.Lanka Floortiles PLC Annual Report 2010 - 11

7125. Cash generated from operationsReconciliation of profit before tax to cash generated from operations:GroupCompanyYear ended 31st March 2011 2010 2011 2010Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Profit before tax 710,107 489,659 702,616 502,041Adjustments for:Depreciation (Note 5) 153,448 145,758 148,430 140,509Interest expense (Note 21) 24,300 65,867 24,298 65,866Interest income (Note 21) (6,709) (10,273) (6,709) (10,273)Gratuity charge (Note 17) 4,787 7,517 4,787 7,517Profit on sale of shares in associate - (1,041) - (1,041)Profit on disposal of property, plant andequipment (Note 19) (3,310) (115) (2,456) (115)Provision for slow moving inventories 7,861 3,559 8,426 5,974Share of results of associate (Note 9) (5,163) 8,591 - -Proportionate interest of the unrealized profit onPCP inventories held by LTTL (Note 10) 38 595 - -Changes in working capital- inventories (26,928) 212,765 (32,207) 201,863- trade and other receivables 55,345 (119,062) 55,455 (119,988)- trade and other payables (16,099) 56,327 (4,858) 67,290Cash generated from operations 897,677 860,147 897,782 859,64326. ContingenciesContingent liabilitiesThere were no material contingent liabilities at the balance sheet date.27. CommitmentsCapital commitmentsThere were no material capital commitments outstanding at the balance sheet date.Financial commitmentsOperating lease commitments where the Company is the lesseeThe future minimum lease payments under non cancellable operating leases are as follows:GroupCompanyAs at 31st March 2011 2010 2011 2010Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Not later than one year 8,704 17,525 14,704 23,725Later than one year not later than five years 16,077 5,103 40,077 29,10324,781 22,628 54,781 52,828The Group and Company are committed to pay Rs. 275,000/- and Rs. 100,000/- respectively as rent per month for theuse of buildings situated at Rajagiriya and Kandy.Lanka Floortiles PLC Annual Report 2010 - 11

72Notes to the financial statements Contd.Further, Lanka Floortiles PLC is committed to pay to Ceradec (Private) Limited a sum of Rs. 500,000/- per month as rentfor the use of production facilities situated at Ranala.Lanka Floortiles PLC is also committed to pay vehicle hire rentals of Rs. 192,050/- and Rs. 72,937/- per month to CentralFinance Company PLC and Peoples Leasing PLC respectively.There were no other material financial commitments outstanding at the balance sheet date.28. Related party transactionsThe Directors of the Company are also Directors of the following companies with which Lanka Floortiles PLC carried outbusiness transactions in the ordinary course of business.Mr. A A Dr. S Mr. J A P MPage Selliah Jayasekera(Chairman) (Deputy (Managing Mr. P L Mr. J C Mr. S R de Mr. A T P Mr. V R Mr. SChairman) Director) Amerasinghe Page Silva Edirisinghe Page MendisLanka Ceramic PLC x - x - x - x - -Lanka Walltile PLC x x x - - x x x xCeradec (Private) Limited x x x x x x - - -Lanka TilesTrading (Private) Limited x x x x x x - - -Parquet (Ceylon) PLC x x x - - - - - -Cargills (Ceylon) PLC x - - - x - x x xLanka Walltile Meepe(Private) Limited x x x - - x - x -Aristons (Private) Limited - - - x - - - - -Horana Plantations PLC x x - - - - - x xCT Land Development PLC x - - - x - x x -CT Properties(Private) Limited - - - - x - - x -Uni-Dil Packaging Limited x - - - - - - - -Uni-Dil Paper Sacks(Private) Limited x - - - - - - - -Ceykor AluminiumIndustries Limited x x x - - - - - -Mr. V R Page and Mr. S Mendis were appointed as Directors of Lanka Floortiles PLC with effect from 25th January 2011.Mr. S R de Silva resigned from his directorate with effect from 30th July 2010.“X” denotes directorateThe Company is controlled by Lanka Walltile PLC which owns 54.51% (2010 - 54.51%) of the Company’s shares. Theremaining 45.49% of the shares are widely held. The ultimate parent of the Company is CT Holdings PLC.Lanka Floortiles PLC Annual Report 2010 - 11

73The related parties with whom Lanka Floortiles PLC carried out transactions in the ordinary course of business are setout below:Year ended 31st March 2011 2010Rs. ‘000 Rs. ‘000(a) Sale of goods to:Lanka Walltile Meepe (Private) Limited Raw materials - 7,615Finished goods 40,681 17,264Fixed assets 1,883 7,644Lanka Walltile PLC Finished goods 2,117 -Lanka Ceramic PLC Finished goods 4,293 22,462Cargills (Ceylon) PLC Finished goods 13,748 1,306CT Land Development PLC Finished goods 38 335CT Properties Limited Finished goods - 68Parquet (Ceylon) PLC Raw materials 72,265 59,643135,025 116,337(b) Purchase of goods from:Parquet (Ceylon) PLC Finished goods 102,171 75,025Lanka Ceramic PLC Raw materials 54,819 36,342Ceradec (Private) Limited Raw materials, consumables and spare parts 547 911Cargills (Ceylon) PLC Consumables 168 637Lanka Walltile PLC Raw materials 3,982 -Fixed assets - 2,673Uni-Dil Paper Sacks (Private) Limited Packing materials 1,601 2,639Uni-Dil Packaging Limited Packing materials 196 4,247163,484 122,474(c) Purchase of services from:Lanka Walltile PLC Surface grinding - 76Puncher 706 -706 76(d) Receipt of funds from:Lanka Tiles Trading (Private) Limited 103,099 25,633103,099 25,633(e) Transfer of funds to:Ceradec (Private) Limited 12,530 10,950Parquet (Ceylon) PLC 25,411 30,14037,941 41,090Lanka Floortiles PLC Annual Report 2010 - 11

74Notes to the financial statements Contd.Year ended 31st March 2011 2010Rs. ‘000 Rs. ‘000(f) Expenses incurred and transferred toCeradec (Private) Limited- Taxes 1,574 1,675Lanka Tiles Trading (Private) Limited- Administration expenses 454 59- Business Turnover Tax 219 227- Income tax/ Economic Service Charge 3 392Lanka Walltile PLC- Administration expenses 1,620 734- Distribution expenses 23,418 26,706Parquet (Ceylon) PLC- Administration expenses 7,215 4,860- Financial expenses 5,214 5,883Ceykor Aluminium Industries Limited- Administration expenses 101 -39,818 40,536(g) Key management compensationKey management personnel include members of theBoard of Directors of Lanka Floortiles PLC and its subsidiary companies.Salaries and short-term employee benefits 21,069 18,127(h) Rental expenseThe Company has paid a rental of Rs. 6,000,000/- to Ceradec (Private) Limited for the use of production facilities, andRs. 2,310,000/- to Parquet Ceylon PLC for the use of warehouse space at Balummahara, during the financial year ended31st March 2011.(i) Rental IncomeThe Company has received a rental of Rs. 2,616,000/- from Parquet Ceylon PLC for the use of Grout and Mortarmachines and Rs. 4,980,000/- from Lanka Walltile PLC as rental income for Biyagama warehouse, during the financialyear ended 31st March 2011.(j) Loans given to Parquet (Ceylon) PLCThe property owned by Parquet (Ceylon) PLC at Balummahara, has been mortgaged to Lanka Floortiles PLC as securityto the value of Rs. 95 Mn. against the outstanding balance due to Lanka Floortiles PLC by Parquet (Ceylon) PLC. LankaFloortiles PLC charges interest at 12% per annum on the loans given to Parquet (Ceylon) PLC.(k)Mr. P L Amerasinghe who is a Director of the Company is also a Director of Aristons (Private) Limited. The Companyhas purchased raw materials from M/s Sibelco UK Limited of United Kingdom, amounting to Rs. 2,560,278/- duringthe year. Aristons (Private) Limited is the local agent of M/s Sibelko UK Limited.Lanka Floortiles PLC Annual Report 2010 - 11

75(l)Outstanding balances arising from sale / purchase of goods / servicesAs at 31st March 2011 2010Rs. ‘000 Rs. ‘000Receivables from related parties:Parquet (Ceylon) PLC 105,047 87,387Lanka Walltile PLC [Parent Company] 36,620 39,187Lanka Ceramic PLC - 75,883Ceykor Aluminium Industries Limited 101 -141,768 202,457Payables to related parties:Lanka Tiles Trading (Private) Limited 476,613 470,715Ceradec (Private) Limited 110,103 104,395Lanka Ceramic PLC 4,032 73,127590,748 648,237The Directors have disclosed the nature of their interests in contracts at meetings of Directors.29. Events after the balance sheet dateNo other events have occurred since the balance sheet date, which would require adjustments to ordisclosure in the financial statements.Lanka Floortiles PLC Annual Report 2010 - 11

Five Year Summary of Balance Sheet76As at 31st March 2007 2008 2009 2010 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000ASSETSNon-current assetsProperty, plant and equipment 1,066,062 1,170,651 1,376,364 1,329,845 1,535,472Capital work-in-progress 30,512 71,358 72,667 140,022 85,071Intangible assets 301 301 301 301 301Investments in associates 10,583 43,394 29,562 128,302 251,2311,107,458 1,285,704 1,478,894 1,598,470 1,872,075Current assetsInventories 506,635 595,505 779,658 562,739 581,768Trade and other receivables 338,094 380,716 439,542 558,431 502,144Cash and cash equivalents 228,880 5,163 7,529 145,672 156,8881,073,609 981,384 1,226,729 1,266,842 1,240,800Total assets 2,181,067 2,267,088 2,705,623 2,865,312 3,112,875EQUITYCapital and reservesStated capital 252,621 429,456 429,456 429,456 900,968Reserves 856,689 1,079,849 1,229,560 1,569,650 1,312,3071,109,310 1,509,305 1,659,016 1,999,106 2,213,275LIABILITIESNon-current liabilitiesSubscription in advance 176,835 - - - -Borrowings 202,666 242,182 238,083 184,101 81,093Deferred income tax liabilities 53,222 68,374 92,132 106,448 126,776Defined benefit obligations 39,847 50,725 37,393 41,715 45,129472,570 361,281 367,608 332,264 252,998Current liabilitiesSubscription in advance 12,867 - - - -Trade and other payables 225,040 248,244 289,523 346,331 462,858Current income tax liabilities 28,927 41,172 35,429 39,899 96,059Borrowings 332,353 107,086 354,047 147,712 87,685599,187 396,502 678,999 533,942 646,602Total liabilities 1,071,757 757,783 1,046,607 866,206 899,600Total equity and liabilities 2,181,067 2,267,088 2,705,623 2,865,312 3,112,875Lanka Floortiles PLC Annual Report 2010 - 11

77Five Year Summary of IncomeStatementYear ended 31st March 2007 2008 2009 2010 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Sales (with VAT) 2,329,119 2,839,037 2,905,794 3,174,760 3,372,014Operating profit 396,792 464,381 477,813 541,000 708,598Finance costs (55,529) (52,020) (78,384) (42,750) (3,654)Share of results of associate (1,929) (2,766) (5,719) (8,591) 5,163Profit before income tax 339,604 409,595 393,710 489,659 710,107Income tax expense (66,652) (96,561) (111,365) (110,571) (198,221)Profit for the year 272,952 313,034 282,345 379,088 511,886Profit attributable to theequity holders of the Company 272,952 313,034 282,345 379,088 511,886Dividends (94,733) (121,258) (121,864) (120,955) (291,777)Retained profit for the year 178,219 191,776 160,481 258,133 220,109Earnings per share - basic (Rs) 5.15 5.90 5.33 7.15 9.65Lanka Floortiles PLC Annual Report 2010 - 11

78Shareholder InformationYear ended 31st March 2007 2008 2009 2010 2011Authorised share capital (Rs. Mn.) 500.0 500.0 500.0 500.0 500.0Stated capital (Rs. Mn.) 252.6 429.4 429.4 429.4 900.9Shares in issue (Mn.) 25.26 30.31 42.44 42.44 53.05(as at end of year)Shareholders- Institutions (Number) 179 175 159 147 209- Individuals (Number) 1,665 1,658 1,626 1,576 1,818Total 1,844 1,833 1,785 1,723 2,027Shares held by- Institutions (%) 70.3 72.2 85.44 86.16 83.67- Individuals (%) 29.7 27.8 14.56 13.84 16.33Total 100.0 100.0 100.0 100.0 100.0Transactions (Number) 829 626 938 2,588 5,465Shares traded (Mn.) 2.83 1.21 0.95 7.17 20.90Dividends (%) 37.5 41.2 26.0 37.5 36.7Dividends per share (Rs.) 3.75 4.12 2.60 3.75 3.50Market price per share- Highest during the year (Rs.) 81.50 67.00 73.50 100.00 143.00- Lowest during the year (Rs.) 49.00 43.25 28.00 28.75 87.00- As at end of the year (Rs.) 49.00 63.50 28.50 87.75 131.10Market Capitalization (Rs. Mn.) 1,237.8 1,925.00 1,209.50 3,724.14 6,954.90(as at end of year)Earnings per share (Rs.) 5.15 5.90 5.33 7.15 9.65Price/Earnings ratio (Times) 9.52 10.77 5.35 12.27 13.58Net assets per share (Rs.) 20.91 28.46 31.29 37.68 41.72(as at end of year)Distribution of Shareholdings as at 31st March 2011Size of shareholdings Shareholders Shares HoldingsNumber Number Number %1 - 1,000 1,369 327,215 0.621,001 - 10,000 499 1,643,059 3.1010,001 - 100,000 121 3,402,510 6.41100,001 - 1,000,000 32 9,269,282 17.47Over - 1,000,000 6 38,408,344 72.402,027 53,050,410 100.00Lanka Floortiles PLC Annual Report 2010 - 11

7920 Major Shareholders as at 31st March 2011Shareholding Cumulative ShareholdingShareholder’s name Number % % 31.03.20101 Lanka Walltile PLC 28,916,742 54.508 54.508 23,133,3942 Employees Provident Fund 4,312,865 8.130 62.638 2,474,8323 Arunodhaya Industries (Pvt) Ltd 1,310,000 2.469 65.107 1,079,4004 Arunodhaya Ltd 1,310,000 2.469 67.576 1,079,4005 Arunodhaya Investments (Pvt) Ltd 1,310,000 2.469 70.046 1,079,4006 Bank of Ceylon (Ceybank Unit Trust) 1,248,737 2.354 72.400 1,455,6307 Bank of Ceylon No. 1 Account 916,800 1.728 74.128 -8 Andysel Private Limited 630,000 1.188 75.315 519,2749 Mr. K R Kamon 537,628 1.013 76.329 561,46310 Mrs. A Selliah 530,000 0.999 77.328 445,20011 Mr. K Aravinthan 530,000 0.999 78.327 445,20012 Miss. S Subramaniam 530,000 0.999 79.326 445,20013 Mrs. A Kailasapillai 530,000 0.999 80.325 445,20014 Mr. V Kailasapillai 530,000 0.999 81.324 445,20015 Union Assurance PLC / No. 1 A/C 455,200 0.858 82.182 -16 Mr. A A Page 357,425 0.674 82.856 282,94017 Aviva NDB Insurance PLC A/C No. 07 280,000 0.528 83.384 -18 NDB Aviva Wealth Management Ltd. S/A HND 258,100 0.487 83.870 -19 Mr. S V Somasundaram 254,575 0.480 84.350 -20 The Sri Lanka Fund 250,000 0.471 84.821 -Sub Total 44,998,072 84.821Others 2,007 Shareholders 8,052,338 15.18Grand Total 53,050,410 100.00Lanka Floortiles PLC Annual Report 2010 - 11

80Statement of Value AddedYear ended 31st March 2007 2008 2009 2010 2011Rs ‘000 % Rs ‘000 % Rs ‘000 % Rs ‘000 % Rs ‘000 %Sales 2,329,119 2,839,037 2,905,794 3,174,760 3,372,014Duty rebate 1,603 1,476 1,463 1,067 13Other income 10,183 8,529 11,639 12,625 19,177Less: cost of materials &services bought in (1,339,654) (1,684,911) (1,734,502) (1,811,223) (1,757,192)Value Added 1,001,251 1,164,131 1,184,394 1,377,229 1,634,012Distribution of Value AddedEmployees as remunerationand welfare 215,226 21.5 250,691 21.6 231,006 19.5 274,715 20.0 321,590 19.7Government as taxes 336,310 33.6 420,987 36.2 428,036 36.1 497,480 36.1 607,617 37.2Lenders of capital as interest 62,629 6.3 58,139 5.0 89,375 7.6 65,867 4.8 24,300 1.5Shareholders as dividends 94,733 9.5 121,258 10.4 121,864 10.3 120,955 8.8 291,777 17.9Retained in the business as- Depreciation/deferred tax 114,134 11.4 121,280 10.4 153,633 13.0 160,075 11.6 173,779 10.6- Profits 178,219 17.8 191,776 16.4 160,480 13.6 258,137 18.7 214,949 13.2Total 1,001,251 100.0 1,164,131 100.0 1,184,394 100.0 1,377,229 100.0 1,634,012 100.0Lanka Floortiles PLC Annual Report 2010 - 11

Notice of Meeting81NOTICE IS HEREBY GIVEN that the Twenty Seventh Annual General Meeting of Lanka Floortiles PLC will be held atthe Sri Lanka Foundation Institute, 100, Independence Square, Colombo 07 on 26th August 2011 at 9.30 a.m. and thebusiness to be brought before the Meeting will be:1. To receive and consider the Annual Report of the Board of Directors on the affairs of the Company and the Statementof Accounts for the year ended 31st March 2011 with the Report of the Auditors thereon.2. To re-elect as a Director Mr. P L Amerasinghe who retires by rotation in terms of Article No. 103 and 104 of theArticles of Association of the Company.3. To re-elect as a Director Mr. J C Page who retires by rotation in terms of Article No. 103 and 104 of the Articles ofAssociation of the Company.4. To re-elect as a Director Mr. V R Page in terms of Article 110 of the Articles of Association of the Company.5. To re-elect as a Director Mr. S Mendis in terms of Article 110 of the Articles of Association of the Company.6. To authorise the Directors to determine donations for the ensuing year.7. To re-appoint Messrs. PriceWaterhouseCoopers, Chartered Accountants as Auditors of the Company and to authorisethe Directors to determine their remuneration.By Order of the BoardLanka Floortiles PLCP W Corporate Secretarial (Pvt) LtdSecretariesColombo05th July 2011Notes: A member entitled to attend and vote at the meeting is entitled to appoint a Proxy to attend and voteinstead of him/her. A Proxy need not be a member of the Company. A Form of Proxy is enclosed for this purpose.The completed form of Proxy should be deposited at the Registered Office of the Company, No. 215, Nawala Road,Narahenpita, Colombo 5 not less than forty-eight (48) hours before the time fixed for the commencement of theMeeting.Lanka Floortiles PLC Annual Report 2010 - 11

Notes82Lanka Floortiles PLC Annual Report 2010 - 11

Form of Proxy83I/We the undersigned ........................................................................................……....NIC No….........................................of .......................................................................................................................................................................................….being a member/s* of Lanka Floortiles PLC hereby appoint:Mr. Anthony Asokumar Pageof Colombo or failing him*Dr. Sivakumar Selliahof Colombo or failing him*Mr. Jayasekera Arachchige Panduka Mahendra Jayasekera of Colombo or failing him*Mr. Peter Lucien Amerasingheof Colombo or failing him*Mr. Joseph Chandrakumar Page of Colombo or failing him *Mr. Antoine Theodore Priyalal Edirisingheof Colombo or failing him*Mr. Valentine Ranjitkumar Pageof Colombo or failing him*Mr. Sunil Mendisof Colombo or failing him*...............................................................................................................................................................of …………..…………………………………………………………………………………………...............................................................…………...my/our * Proxy to vote as indicated hereunder for me/us* and on my/our* behalf at the Twenty Seventh Annual GeneralMeeting of the Company to be held on 26th August 2011 at 9.30 a.m. at every poll which may be taken in consequenceof the aforesaid Meeting and at any adjournment thereof:Resolution 1To receive and consider the Report of the Directors and the Statement of Accounts for theyear ended 31st March 2011 with the Report of the Auditors thereon.Resolution 2To re-elect Mr. P L Amerasinghe who retires in terms of Article No. 103 and 104 of theArticles of Association of the Company, as a Director.Resolution 3To re-elect Mr. J C Page who retires in terms of Article No. 103 and 104 of the Articles ofAssociation of the Company, as a Director.Resolution 4To re-elect Mr. V R Page as a Director in terms of Article No.110 of the Articles ofAssociation of the Company.Resolution 5To re-elect Mr. S Mendis as a Director in terms of Article No.110 of the Articles ofAssociation of the Company.Resolution 6To authorise the Directors to determine donations for the ensuing year.Resolution 7To re-appoint Messrs. PriceWaterhouseCoopers, Chartered Accountants as Auditors of theCompany and authorise the Directors to determine their remuneration.In witness my/our* hands this .................. day of .......................... Two Thousand andEleven.ForAgainst..............................................Signature of Shareholder/s* Please delete the inappropriate words.Instructions as to completion appear on the reverse.Lanka Floortiles PLC Annual Report 2010 - 11

84Form of Proxy Contd.Instructions as to Completion1. This Form of Proxy must be deposited at No. 215, Nawala Road, Narahenpita,Colombo 5 not less than forty eight (48) hours before the time fixed for theMeeting.2. In perfecting the Form of Proxy please ensure that all details are legible.3. If you wish to appoint a person other than a Director of the Company as your proxy,please insert the relevant details in the space provided.4. Please indicate with an ‘X’ in the space provided, how your proxy is to vote on theresolution. If no indication is given, the proxy in his discretion will vote as he thinksfit.5. In the case of a Company/Corporation, the proxy must be under its Common Seal,which should be affixed and attested in the manner prescribed by its Articles ofAssociation.6. In the case of a Proxy signed by an Attorney, the Power of Attorney must be depositedat The Secretaries’ Office (i.e. P W Corporate Secretarial (Pvt) Ltd, No.3/17, KynseyRoad, Colombo 8) for registration.7. In the case of joint holders the Form of Proxy must be signed by the first holder.Lanka Floortiles PLC Annual Report 2010 - 11

Corporate InformationName of the CompanyLanka Floortiles PLCLegal FormPublic Limited Liability Company listed on the ColomboStock Exchange. ( Incorporated as a Private LimitedLiability Company on 30th March 1984 under theCompanies Act No. 17 of 1982 and converted to a PublicLimited Liability Company on 07th August 1984.) TheCompany was re-registered under the New CompaniesAct No. 07 of 2007 on 19th March 2008. (Registration No.PQ 129)Registered Office215, Nawala Road, Narahenpita, Colombo 05Telephone : + 94 -11 - 2808050 / 2808001-3Facsimile : + 94 -11 - 2806232E-mail : flotiles@slt.lkWebsite : www.lankatile.comFactorySt. James Estate, Jaltara, RanalaTelephone : + 94 - 11 - 4443001-3Facsimile : + 94 - 11 - 4443000E-mail : factory@lankatile.comDirectorsMr. Anthony A Page (Chairman)Dr. S Selliah (Deputy Chairman)Mr. J A P M Jayasekera (Managing Director)Mr. P L AmerasingheMr. J C PageMr. A T P EdirisingheMr. V R PageMr. S MendisSecretariesP W Corporate Secretarial (Pvt) LtdNo. 3/17, Kynsey RoadColombo 08Telephone : + 94 -11 - 4640360-3Facsimile : + 94 -11 - 4740588E-mail : pwcs@pwcs.lkBankersHongkong & Shanghai Banking Corp. LimitedCommercial Bank of Ceylon PLCBank of CeylonCitibank N.A.DFCC BankHatton National Bank PLCAuditorsPricewaterhouseCoopersChartered Accountants100, Braybrooke Place, Colombo 2.Telephone : + 94 - 11 - 4719838Facsimile : + 94 - 11 - 2303197Produced by Copyline (Pvt) Ltd.

Lanka Floortiles PLC