Galadari Hotels (Lanka) ) PLC has posted a substantial loss of Rs.575.4 million in the year ended December 31, 2007, down from a loss of Rs.648 million the previous year, and is carrying massive accumulated losses of nearly Rs.8 billion in its books according to the company’s annual report now with shareholders.

The Galadari’s auditors, Ernst & Young, have said that the recurring losses has seen its issued capital eroded raising doubts about the company’s ability to continue as a going concern. They noted that the accumulated losses have exceeded the company’s stated capital by Rs.6.2 billion as at December 31, 2007.

However the directors have pointed out that the government has agreed to convert a loan to equity and Galadari Brothers Company LLC, a major creditor, have rendered comfort. They were confident that the business could continue as a going concern.

In June last year the company has been informed that a government loan extended to it through the SRCC & T Fund (Strikes, Riots, Civil Commotion and Terrorism Fund) has been approved to be converted to equity.

"Accordingly, the loan amount and the accrued interest up to 31st July 2006 should be converted into equity. Any balance amount accrued from 1st August 2006 which has not been taken for the purpose of conversion into equity is payable by the company," the auditors said.

They explained that in this regard the company is awaiting the instruction of the National Insurance Trust Fund as the SRCC & T Fund has now been absorbed into the National Insurance Trust Fund.

At a board meeting held in February 2006, the directors have agreed to convert a part of the loan, amounting to Rs.1.24 billion received from Galadari Brothers Company LLC as equity subject to the approval of the Colombo Stock Exchange and shareholders.

"Further, Galadari Brothers Company LLC has confirmed to the Board of Directors that it will not request repayment of either the loan capital or interest due until excess funds over working capital requirements are available with the company," the auditors said.

"Taking such into consideration, the directors have assessed and are confident that the company will be able to continue in operations for the foreseeable future, hence the adoption of the going concern assumption in presenting these financial statements."

The directors also said in the annual report that in terms of the CSE rules on corporate governance, the board is in the process of restructuring itself to reflect the new rules. They would therefore ensure that the board would include minimum representation of independent directors as required.

"Further in line with the new requirements an Audit Committee and a Remuneration Committee are in the process of being established," the directors said.

"Presently names suggested for independent directors are being considered by the board, and compliance will be completed by the end of the year."

They said they are satisfied with the policies and procedures that have been set up and to the best of their knowledge the company has projected for sufficient reasons to continue in business long-term.

They said that therefore the financial statements had been prepared on a going concern basis with accounting policies consistently applied and "supported by reasonable and prudent judgments."

The directors said that the company is totally committed to maintaining high standards of corporate governance and in this regard was guided by the disclosure requirements of the SEC and the CSE.

The Galadari has a stated capital of Rs.1.82 billion, a revaluation reserve of Rs.7.2 billion which included a revaluation surplus following the last revaluation at the end of the year under review.

Interest bearing loans and borrowings were running at Rs.5.8 billion which comprised almost totally of loans from related parties including the government of Sri Lanka (Rs.527.4 million) and Galadari Brothers Company LLC (Rs.5.3 billion).

The Secretary to the Treasury owns 0.16% of the company and is the 19th largest shareholder. The biggest single shareholder is New Nawaloka Hospitals (Pvt) Limited with 24.03% followed by Calgary Holdings (9.95%).

Different members of the Galadari family are also major shareholders in their individual capacities.

In April this year, an award of Rs.101.5 million had been made against the company to Phil East Asia Construction Corporation for which provision has been made. An application has been filed in the High Court of Colombo to set aside the arbitration award.