Chairman's Statement

Following the devastating tsunami of December 2004 the resilience of both our micro level organizations and the economy as a whole were positively postured with the GDP recording a growth rate for the year of over 6%. The Industrial Sector led the way with a growth of 8.3% while Services Sector recorded a growth of 6.4%. With good weather, the Agricultural Sector rebound to record a strong improvement which however, was subdued due to the poor performance of the Coastal Fishing Industry which was one of the worst tsunami affected sub sectors. Inflows of tsunami assistance and the one year moratorium extended by the International Community for debt repayments helped stabilize exchange rates and contain inflation fuelled by high budget deficits over the last few years. The Global Economy on the other hand grew at a slower rate with the escalating Crude Oil prices and robust bust reduced growth in emerging market economies and developing countries excluding India and China which surpassed growth expectations. Local market conditions, Government's plans for infrastructure development and macro economic management contributed to price stability, which in turn helped our entire portfolio of products to record volume improvements in comparison to the previous year. The slower growth rate in Far Eastern economies, Europe and the United States helped in the above growth as we witnessed a slight easing of supply constraints and prices in both raw materials and the residual chemicals we continue to handle.

Our Agrochemicals and Fertilizer businesses benefited with a high percentage of available paddy lands cultivate due to favorable weather and the attractive prices obtained for tea, rubber and coconut. The rehabilitation of properties affected by tsunami helped the Decorative and Coatings business improve its performance in line with the GDP improvement. The Feeds business which commenced the year in a trough improved with better market acceptance and lower input costs of feed ingredients. In terms of contribution our Agri businesses maintained the level of profitability generated in the previous year with losses in certain items off set by profits in products brought into the range in the process of adding diversity to items we produce and market.

In the Fertilizer market, world Urea prices remained at around US$ 300 per ton reflecting the higher energy costs which consequently compelled Government to further enhance the subsidy on fertilizer. The increase in subsidy has set in motion a number of initiatives by Government which has impacted on the private sector fertilizer marketing organizations which in the past imported and distributed over 75% of fertilizer used each year.

In the face of criticism for the delay in reimbursing subsidy payments, the Government took an unprecedented decision to give the subsidy only to state owned enterprises ensuring that the fertilizer used by rural peasant farmers cultivating small tracts of land mainly with paddy would be made available through the Fertilizer Corporation and the Government owned business of the Colombo Commercial Company. Even though fertilizer companies can sell to the paddy farmer the price differential has unwittingly ensured a monopoly for the distribution of paddy fertilizer adversely impacting on the private sector companies who have rendered yeoman service to the farmers. This is an unfair decision considering the contribution the private sector has made in extending credit and providing technical advice on soil, water and fertilizer management to farmers. We have appealed to the Government to review this position urgently by restoring a level playing field for both the public sector organizations and private sector organizations. We are hopeful that the Government would re-think its position in the short term as we believe that to develop and build a parallel distribution capacity which is already available with the private sector would not be conducive to agricultural development.

olicy Planners focus mainly on the inputs in the paddy sector. In areas where yields equal 100 bushels, input costs are estimated at around Rs.2.70 or Rs.6.00 per kg of rice produced, depending on the fertilizer subsidy utilization. At the guaranteed price of Rice at Rs.16/- per kg, this projects a gross return of 83% or63% making a strong case for maintaining the efficient distribution channels currently available with public sector-private sector competition.

The more acute problem is that young people do not want to take up farming due to the perceived low returns contrary the above due to small plot sizes. With our average land holdings which is less than an acre, average labour-days utilized for cultivation is a mere 40, making a strong case for agglomeration if we are to obtain the best returns from the lands available and also address the issues above. This has been tacitly taking place in a small way but would get retarded dramatically with the controls to obtain subsidized fertilizer. Consolidation would also enable greater mechanization making paddy farming attractive to the younger generation and release labour to the more attractive added value industries and other opportunities for diversification, which is bound to improve rural incomes thus uplifting living standards. This is what has happened globally and it would not be prudent to ignore opportunities in this direction. The Government should review its policies and strategies from the trough of the past if they are serious about uplifting rural living standards.

Last year, I briefed our shareholders on the efforts we are making in the production of F1 Generation Potato Tubers using our tissue culture laboratory and production of Big Onion Seed in collaboration with the Department of Agriculture and REAP, Matale. The F1 Generation Seed Potato has enabled farmers to obtain yields of 35 to 1 while the Big onion production has continued to improve albeit at a slower pace than anticipated. Last year, we also lounged our Organic Fertilizer under the brand name “CIC SARU”. While soil management and water management technologies need substantial assistance, subsidies have had a negative impact in these two areas, which needs to be addressed in the short to medium term.

CIC Feeds (pvt) Limited made steady progress through the year. We have now established ourselves as a quality Feed Miller providing consistent value and service to our many customers. During the year we de-bottlenecked the plant at Ekala enhancing capacity from 6,000 to 9,000 tons a month which helped to increase our sales volume for the year by 21,000 tons or 35%. Day old chick sales on the other hand recorded an increase of only 8.6% reflecting lower input levels of the industry due to bird flu scares. We have also made significant investments on land, targeting the expansion of capacities of the Breeder Farm and Hatchery to meet future requirements. A further Rs. 75 million out of an estimate of Rs. 120 million has been earmarked for the construction of Breeder cum Poultry Cages at this new site. A subsidiary BOI company has been set up to undertake the operation of commercial poultry farms into which area we will venture in the coming years. With these improvements the Feed Business is expected to maintain its growth propensity barring a breakout of Avian Flu which could derail progress and plans.

The Vetcare business delivered results which is an improvement in comparison to the previous years. The full range of vaccines, Medicines, Vitamins, and Feed Additives complements our Feed Business. Consequently, we benefit from the synergies of both operations and contain our overhead expenses by using a pool of Veterinarians to carry out extensive therapeutic and marketing functions.

Dulux our flagship brand continues to enjoy a dominant market share which has been built up on the basis of quality, color, innovation and of course its ability to delight customers. Consequently, as in the past years the brand maintained its position recording an exceptionally strong year in terms of top line growth and profitability despite several significant market issues during the period. Seventeen of our channel partners had their businesses washed away with the tsunami while many others were affected as their markets were totally devastated following the tsunami. Trading in the North-East too did not measure up to its full potential. The new products such as Crack Bridging and Color Enhancing Primer Ultra and Necol performed to expectations. In the Auto Refinish area we have strengthened our relationship with the National Apprentice Industrial Authority, which is the main trading body of the Government. This has helped us to establish relationships with the trainees of the Institute who are passing out as Painters each year. Our operations have been tightly managed with operating costs capped inspite of difficult market conditions and working capital contained as we converted retail channel partners from credit sales to cash customers. The company received a tremendous boost of encouragement when we secured ourselves the ICI Global Awards for Sustainability in the Category of Community Involvement. Our entry for this Award first won at the ICI Paints Regional level and later at the International Business level, we were nominated for the Global Business Awards which has presented to the Company by the Chief Executive Officer of Imperial Chemical Industries Plc., UK , Dr. John McAdam.

The Chemanex Group recorded a substantial improvement in the turnover for the year. The consolidated profits however, were dampened by the negative contribution made by the export companies handling chemicals. Both, Chemanex Adhesives (pvt) Limited and the CAL Exports (pvt) Limited were impacted by high raw material cost which could not be passed on to consumers. Additionally, we had to contend with quality issues with one of our key customers. We have concentrated on our core competencies to get over these issues and are confident that future growth would be in line with performance in the earlier years. Both companies have also expanded their customer base to incorporate most multinational detergent manufacturers. With this global reach, these businesses would return to profitability in the coming year while contributing to the performance of Chemanex Exports (pvt) Limited which too had a poor year.

Yasui Lanka (pvt) Limited the manufacturer of Knitted Gloves had a successful year with a near 40% increase in turnover and a 50% increase in profit after taxation. The samples of Polka dotted gloves using the new machine imported by us have not generated anticipated sales even though the product has been distributed to a number of customers. Our dependence on a single customer and the resultant vulnerability which we have endeavored to reduce remains, even though the customer has classified us as a preferred supplier based on the quality, delivery, price ect.

Premier Electronics (pvt) Limited which took over the residual customer durables business and developed the Grundig and Timex brands of TVs and wristwatches respectively performed poorly in the face of intense competition. As we are not in a position to build these brands, your Directors considered it prudent to exit from this operation. To replace this turnover the Company entered into a strategic partnership with CIC Paints (pvt) Limited with a view to participating in a part of the paints distribution channel of which we currently operate four Retail outlets.

Chemanex's strategic investments in the sector encompassing financial services namely, Commercial Insurance Brokers (pvt) Limited and Commercial Leasing Company Limited continues to pay rich dividends. These two companies out-performed similar companies in their area of operations as the growth rates achieved is substantial improvement on the previous year.

Overall, Chemanex has increased turnover by Rs.112 million or 12%, generating a net profit after taxation and minority interest of Rs. 116.5 million. This is a reduction of around 3% in comparison to the previous year which could be attributed to the poor showing of the export companies.

Cisco Specialty Packaging (pvt) Limited came out of the trough of the previous year recording an improvement in profit of 26%. Turnover however, remained depressed due to lower export volumes and the transfer of the 500ml. bottle of Coke to the machine located at the Coca-Cola Factory, which only attracted commissions. While adding to the customer base for existing products, we continue to add new moulds incorporating fresh designs to grow the market.

ink Natural Products (pvt) Limited our subsidiary retained its position as a prime producer of scientifically developed Herbal Healthcare Products and premium quality Essential Oils. The Research &Development Division of the Company has successfully launched a number of new products during the year which should contribute to both turnover and profit growth in the future. The company was the recipient of the National Science and Technology Award for 2005 for the development of standardized Ayurvedic Herbal Pharmaceuticals and the prestigious Presidential Environmental Award for 2004 in the Industrial Sector. In order to fully exploit the Company's export potential, it is necessary to enhance good manufacturing practice and obtain HACCP Certification as early as possible. During the year the Company spent Rs. 45 million to upgrade some of its facilities to required international standards. During the year the Company's turnover increased from Rs. 406 million to Rs. 450 million while the pre-tax profit improved to Rs. 42.6 million from Rs. 24.7million achieved in the earlier year. The Company has also consolidated its position as a quality supplier of Essential Oils and improved its sales from Rs. 41 million to Rs. 65 million. With Sri Lanka 's Bio-diversity and Ayurvedic traditions Link Natural Products (pvt) Limited deliver substantially improved results in the coming years.

CIC Environmental Management Liquid (pvt) Limited had a poor year due to a shortfall in technology from our foreign partners. Though we won tenders amounting to over Rs. 70 million two projects manufacturing similar goods and generating the same type of effluent ran into technical problems which needed additional expenditure to redress. This caused the Company to incur a loss which I am sure would be recouped in the coming years. We are also negotiating an Agreement with a Minnesota based Civil Construction Company involved in Drainage and Effluent Treatment named HDR Engineering Inc. for quoting for larger infrastructure treatment plants which are in the pipeline for the future.

Nalco the water treatment arm of the Company where we enjoy a dominant market share has recorded an improved performance in comparison to the last year. As stated last year, Nalco Singapore continues to provide customers with excellent service levels which would help us to grow the customer base as environmental issues gather momentum.

The Industrial Chemicals Division benefited from the growth in the Paints and the export businesses which resulted in a 10% increase in the volume of Latices we market. The profitability of the Adhesives and Paint Latices improved during the year as we were able to effect the necessary price increases in a timely manner. The Consumer & Hardware Business Unit recorded a very marginal improvement as the Solco Department was affected with excess production capacity built up by a number of manufacturers, while Johnson & Johnson witnessed a year of consolidation after two consecutive years of doubling digit growth figures.

The Company's turnover at Rs.2.03 billion recorded an increase of Rs. 0.03 billion of 17% in comparison to the previous year. Profit after tax and interest improved by Rs.44 million to Rs.174.49 million. The above increase was achieved despite the increases in finance charges of Rs. 12 million and taxation of Rs. 17.3 million.

• To increase the Authorized Share Capital of the Company to Rs. 1 billion divided into Seventy Four Million Nine Hundred and Eighty Thousand Ordinary Shares of Rs. 10/- each, Twenty Five Million Non-Voting (Class X) shares of Rs. 10/-each and Twenty Thousand 12% Redeemable Preference shares Rs. 10/- each.

• To approve the Rights Issue of one new Ordinary Share for each existing Ordinary Share at a price of Rs. 62/- each inclusive of a premium of Rs. 52/- per Ordinary Share and one new Non-Voting (class X) share for each existing Non-Voting( Class X) share at a price of Rs. 35/- per share inclusive of a premium of Rs. 25/- per Non-Voting (Class X) share.

• To approve the appropriation and the capitalization of a sum of Rs. 315.9 million being part of the sum of Rs. 1,182.13 million standing to the credit of the Reserves in the Company's Balance Sheet as at 31 st December 2005.

• At the conclusion of the Rights Issue the sum appropriated as above be utilized to distribute as fully paid Ordinary and Non-Voting Shares(ClassX) shares amongst Ordinary and Non-Voting (Class X) shareholders or their nominees new shares in the proportion of Three new shares of Rs. 10/- each for every Two existing shares of Rs. 10/- each.

The Rights Issue was completed on the 9 th of May 2006 with all Rights been taken up. The approval of the Colombo Stock Exchange was then sought and received for Bonus Issues which is scheduled to be completed on the 7 th of July 2006 .

Group turnover at Rs. 12.91 billion showed an increase of Rs. 12.91 billion showed an increase of Rs. 2.27 billion in comparison to the previous year, which is an improvement of 21%. The Key contributors to this large increase were CIC Feeds (pvt) Limited which recorded an increase of 45% and CIC Paints (pvt) Limited which recorded an increase of 18%. Group profitability too increased with CIC Fertilizers, CIC Feeds and CIC Paints recording excellent results for the year. Consolidated profit also includes write back of Negative Goodwill arising out of the acquisition of CIC Feeds (pvt) Limited and Chemanex Limited.

IC continues to be the leader in innovation and quality in all the sectors in which it operates and provides value for money to our customers. We continuously invest in our Human resource training and brand development. Consequently, we are optimistic that the full portfolio of the products would continue to generate returns in accordance with market conditions and the potential for our business. Your Directors now recommend a Final Dividend of Rs. 2.65 per share on the issued share capital of the Company as at date which encompasses the Rights Issue of shares prior to the Bonus Issue of Shares. The final dividend is paid out of Dividends received from resident companies on which withholding tax has already been deducted. Consequently, the Final Dividend is not liable to the withholding tax of 10%.

Mr. P. R. Saldin who was a member of the Board of Directors from 4 th April 1995 resigned with effect from 31 st July 2005 . Mr. S. Hamlett who was appointed to the Board of Directors on 28 th January 2000 as a nominee of ICI resigned with effect from 28 th October 2005 . I take this opportunity to thank both Mr. Saldin and Mr. Hamlett for their valuable contributions during the period of their service in the company and wish them well in their future endeavors.

Mr. David S. Whitewood, Corporate Finance Manager of ICI Plc, UK who was nominated in the place of Mr. Steve Hamlett, joined the Board of Directors with effort from 28 th October 2005 . With his wide experience at ICI, I am confident that he will substantially contribute towards the progress of the company.

Mr. S. Harsha Amarasekera, Attorney-at-Law accepted our invitation to join the Board of Directors with effect from 28 th October 2005 . He brings with him a wealth of experience which should add tremendous value to the business. Mr. P.S.C. Fernando who was Financial Director in our Fertilizer Business reverted back to the company and was appointed Director with effect from 28 th October 2005 . The Board of Directors of the Company now has a fine balance between External Directors with an abundance of skills to guide and develop your Company for the future.

I take this opportunity to thank my colleagues on the Board for helping to formulate and implement strategies and controls which will ensure sustainable growth in the future. I also take this opportunity to thank our distributors and loyal customers for their continuing support and patronage and staff at all levels for amply demonstrating their capacity for hard work and changing with the business climate. I also take this opportunity to thank you our shareholders for your continued support at all times which I am sure will be continued to the future.