(Company No X) Incorporated in Malaysia under the Companies Act, 1965

Transcription

1 (Company No X) Incorporated in Malaysia under the Companies Act, 1965

2 COVER RATIONALE The cover design depicts the Group s core competencies and values in the construction industry. As a Group, our core values encompass expertise, integrity, determination and commitment; forces that drive the Group s performance to greater heights for the benefit of our shareholders and customers. The green background illuminates our responsibility as a corporate citizen towards our environment. As the Nation develops, the Group is committed to maintaining and preserving the environment in the areas that we operate in. CONTENTS Corporate Information Corporate Structure Profile of Directors Executive Chairman s Statement Statement on Corporate Governance Directors Responsibility Statement Audit Committee Report Statement on Internal Control Other Compliance Information Directors Report Statement by Directors Statutory Declaration Report of the Auditors Balance Sheets Income Statements Statements of Changes In Equity Cash Flow Statements Notes to the Financial Statements List of Properties Analysis of Shareholdings Notice of Annual General Meeting Statement Accompanying Notice of Annual General Meeting Proxy Form

3 2 I ANNUAL REPORT 2005 MERGE ENERGY BHD. ( X) Corporate Information BOARD OF DIRECTORS Dato Muhammad Azaham bin Abdul Wahab Encik Yusof Badawi Encik Maseri bin Basirah Dr Mohd Soib bin Mustakim Mr Sheah Kok Fah Mr Hew Thin Chay Encik Abd Latiff bin Ahmad Executive Chairman Executive Director/Chief Executive Officer Non-Independent Non-Executive Director Non-Independent Non-Executive Director Senior Independent Non-Executive Director Independent Non-Executive Director Independent Non-Executive Director AUDIT COMMITTEE Chairman Mr Sheah Kok Fah Members Encik Yusof Badawi Mr Hew Thin Chay Encik Abd Latiff bin Ahmad NOMINATION COMMITTEE Chairman Mr Sheah Kok Fah Members Dr Mohd Soib bin Mustakim Encik Abd Latiff bin Ahmad REMUNERATION COMMITTEE Chairman Mr Sheah Kok Fah Members Dr Mohd Soib bin Mustakim Encik Abd Latiff bin Ahmad REGISTERED OFFICE AND BUSINESS ADDRESS No. 2 Jalan Apollo U5/190 Bandar Pinggiran Subang Seksyen U Shah Alam Selangor Darul Ehsan Tel: Fax: / merge@po.jaring.my SHARE REGISTRAR Symphony Share Registrars Sdn Bhd ( D) Level 26, Menara Multi-Purpose Capital Square No. 8 Jalan Munshi Abdullah Kuala Lumpur Tel: Fax: / AUDITORS BDO Binder (AF 0206) 12th Floor Menara Uni.Asia 1008 Jalan Sultan Ismail Kuala Lumpur COMPANY SECRETARY Ms Yoong Wai Ling (MAICSA ) PRINCIPAL BANKERS Affin Bank Berhad (25046-T) Hong Leong Bank Berhad (97141-X) Citibank Berhad ( M) Standard Chartered Bank Malaysia Berhad ( P) Malayan Banking Berhad (3813-K) STOCK EXCHANGE LISTING Bursa Malaysia Securities Berhad - Construction Sector, Main Board

4 MERGE ENERGY BHD. ( X) ANNUAL REPORT 2005 I 3 Corporate Structure ( X) CONSTRUCTION Mewah Kota Sdn. Bhd. Paramount Ventures Sdn. Bhd. Merge Highway Engineering Sdn. Bhd. REALTY MEB Realty Sdn. Bhd. Merge Properties Sdn. Bhd. MEB Development Sdn. Bhd. Merge Properties Management Services Sdn. Bhd. TRADING AND MANUFACTURING Merge Trading Sdn. Bhd. Merge Readymix Sdn. Bhd. Merge Concrete Technologies Sdn. Bhd. The above companies are all wholly-owned subsidiaries of Merge Energy Bhd. The Company is in the process of deregistering two subsidiaries, namely Merge Environmental Engineering Sdn. Bhd. and MEB Management Sdn. Bhd. Documents have been sent to the Companies Commission of Malaysia on 28 January 2005.

5 4 ANNUAL REPORT 2005 MERGE ENERGY BHD. ( X) Profile of Directors Dato Muhammad Azaham bin Abdul Wahab Aged 65 Malaysian Executive Chairman Dato Muhammad Azaham was appointed to the Board on 3 January He graduated from the University of Malaya and did a post-graduate course in Urban Management and Planning at University of Westminster, London. He specialises in organisational development, quality management and leadership studies. Dato Muhammad Azaham served in the Malaysian civil service from He has more than 22 years of experience in the construction and property development industry and has served in listed and non-listed companies involved in the construction and property development. He was active in youth affairs and was the former President of the Malaysian and Asian Youth Council. Dato Muhammad Azaham is a substantial shareholder of the Company, holding 11.94% of the Company s shares through Desa Binapuri Sdn Bhd. Encik Yusof Badawi Aged 43 Malaysian Executive Director/ Chief Executive Officer Encik Yusof was appointed to the Board on 2 May He graduated with a Bachelor of Science in Engineering, major in Civil Engineering and minor in Construction and Mathematics from Southern Illinois University, United States of America. Encik Yusof has 19 years of experience in the construction industry at various levels including senior/board level. He has been actively involved in numerous infrastructure, waterworks and maintenance projects which had been successfully implemented. Encik Yusof is a member of the Audit Committee. He is a substantial shareholder of the Company, holding 11.94% of the Company s shares through Desa Binapuri Sdn Bhd. Encik Maseri bin Basirah Aged 44 Malaysian Non-Independent Non-Executive Director Encik Maseri was appointed to the Board on 18 November He holds a Certificate in Operation and Basic Knowledge on Boiler from the Japan Chamber of Commerce and Industry. Since 1987, Encik Maseri has been actively involved in the landscaping and construction sector. Presently, he is the Managing Director of several private organisations which have participated in several landscaping and construction projects for Lembaga Pembangunan Langkawi (LADA) and Majlis Daerah Langkawi. Encik Maseri is a substantial shareholder of the Company with a direct interest of 14.93%.

6 MERGE ENERGY BHD. ( X) ANNUAL REPORT Profile of Directors Dr Mohd Soib bin Mustakim Aged 48 Malaysian Non-Independent Non-Executive Director Dr Mohd Soib was appointed to the Board on 18 November He graduated with a Bachelor of Science in Colour Vibration Therapy and Complimentary Medicines. Dr Mohd Soib has been a practitioner in complimentary medicines since He was a training officer at the Rubber Industry Smallholders Development Authority (RISDA) from and at Kementerian Pertahanan Malaysia, Bahagian Hal- Ehwal Bekas Perajurit from Dr Mohd Soib is a member of the Remuneration Committee and Nomination Committee. He is a substantial shareholder of the Company with a direct interest of 11.94%. Mr Sheah Kok Fah Aged 41 Malaysian Senior Independent Non-Executive Director Mr Sheah was appointed to the Board on 16 November He holds a degree in LLB (Hons) from the University of Malaya and was admitted to the Bar in Mr Sheah is an Advocate and Solicitor and has been in legal practice since He has been the Partner of Messrs Sheah, Tan and Rahman (formerly known as Messrs Jeffrey Tan & Co. and subsequently as Messrs Ooi, Sheah & Tan) since He has been appointed as a Councillor to Majlis Perbandaran Petaling Jaya for 2 years from Mr Sheah is the Chairman of the Audit Committee, Remuneration Committee and Nomination Committee. Mr Hew Thin Chay Aged 48 Malaysian Independent Non-Executive Director Mr Hew was appointed to the Board on 20 December He is a member of the Malaysian Institute of Certified Public Accountants and Malaysian Institute of Accountants. Mr Hew has more than 27 years of experience at senior/board level and was actively involved in numerous infrastructure projects and corporate finance exercises of several public listed companies. He is also a Director of Kuala Lumpur City Corporation Bhd. Currently, he is managing his own consultancy firm, Red Seed Sdn Bhd. Mr Hew is a member of the Audit Committee. Encik Abd Latiff bin Ahmad Aged 48 Malaysian Independent Non-Executive Director Encik Abd Latiff was appointed to the Board on 16 January He holds a degree in LLB (Hons) from the University of Malaya. Encik Abd Latiff is an Advocate and Solicitor. He started his career in 1981 with the Rubber Industry Smallholders Development Authority (RISDA) and thereafter with Dewan Bahasa dan Pustaka (DBP) before joining the private practice. In 1988, he held the position of Senior Legal Officer in Employees Provident Fund (EPF) before setting up his own legal firm. Encik Abd Latiff is a member of the Audit Committee, Remuneration Committee and Nomination Committee. None of the Directors have: (a) any family relationship with any Directors and/or substantial shareholders of the Company; (b) any conflict of interest with the Company; and (c) any conviction for offences (other than traffic offences) within the past 10 years.

7 6 I ANNUAL REPORT 2005 MERGE ENERGY BHD. ( X) Executive Chairman s Statement Dear Shareholders, On behalf of the Board of Directors, it is my pleasure to present the Annual Report and the Audited Financial Statements of Merge Energy Bhd. Group for the financial year ended 31 January FINANCIAL PERFORMANCE The year 2004 was another challenging year for most Malaysian businesses, more so in the construction industry. The Group achieved a turnover of RM16.81 million and a lower loss after taxation of RM1.04 million for the financial year under review compared to the preceding year s revenue of RM4.92 million and loss after taxation of RM5.54 million. INDUSTRY REVIEW The economy grew by a commendable 7% in 2004 but is expected to achieve a lower growth of 5.5% - 6.0% this year. Nonetheless this may not impact too harshly on the construction industry as the Government had announced that it would spend RM2.4 billion to implement 26 projects scheduled for the 9th Malaysia Plan to be brought forward to this year. This would go a long way to revitalize the sluggish construction industry prior to the 9th Malaysia Plan. As in the previous years the issue of foreign labour has negatively affected the construction industry. The departure of illegal labour and the subsequent difficulty in recruiting legal foreign labour have been a nightmare to contractors. It has not only increased labour cost but delayed project completion. The industry would appreciate any action taken by the Government to overcome this problem. Steps taken to reduce reliance on foreign workers will go a long way to lessen the repatriation of billions of Ringgit out of Malaysia annually. PROSPECTS The strength of our Group is in the water and sewerage sub-sector. As such we will concentrate and build on this strength. I am pleased to inform that our job orders this year has built up to a hefty RM376 million and it will keep our Group busy for the next 2 to 3 years. Hopefully we will be in the black as of financial year 2006 and beyond. We have streamlined our organization and reduced our overhead and operating costs. The Group will continue to source for new jobs in order to maintain healthy growth in the future. APPRECIATION On behalf of the Board, I would like to record our appreciation to Dato Tan Huat Sheng who resigned during the financial year, for his invaluable services rendered during his tenure of service. Our sincere appreciation also goes to our valued shareholders, business associates and financiers for their continuous support and confidence in the Group. I would also like to record the Group s appreciation to the Management and all employees of the Group who have worked hard during these challenging years. A special thanks to the members of the Board who continued to guide and encourage the Management and staff to persevere in our efforts to put the Group on a more sound footing to meet the challenges ahead. Dato Muhammad Azaham bin Abdul Wahab Executive Chairman 20 May 2005

8 MERGE ENERGY BHD. ( X) ANNUAL REPORT 2005 I 7 Statement on Corporate Governance The Board of Directors takes cognizance of the importance of good corporate governance in conducting the affairs of the Group. Integrity, transparency and professionalism are key components in the Board s approach in all its dealings and will continue to be in the future. Holding on to these tenets will enhance shareholders investment and values as well as the financial performance of the Group. The process of inculcating best practices is a continuous process. The Board will continually evaluate the corporate governance practices adopted by the Group to enhance its management practices to be in line with the underlying tenets of the principles and best practices for corporate governance set out in Parts 1 and 2 of the Malaysian Code on Corporate Governance ( the Code ). The Board is therefore pleased to report on how the Group has applied the principles and best practices for corporate governance mentioned in the Code. DIRECTORS 1. Principal Responsibilities of the Board An effective Board leads and controls the Group. The Board is responsible for ensuring that shareholders value and interests are protected and enhanced. The Board is thus responsible for the overall performance of the Group and focuses mainly on strategies, financial performance, standards of conduct and critical business issues. The Board comprised members with a wide range of experience in relevant fields such as engineering and construction, management, accounting, finance and legal which are vital for the success of the Group. Mr Sheah Kok Fah is the Senior Independent Non-Executive Director to whom concerns of Directors may be conveyed should any member of the Board wish to have their concerns addressed by other than the Executive Chairman or Chief Executive Officer. 2. Board Balance The Board consists of seven (7) members, comprising two (2) Executive Directors and five (5) Non-Executive Directors. Among the Non-Executive Directors, three (3) are Independent Non-Executive Directors which complies with the Listing Requirements of Bursa Malaysia Securities Berhad. The composition and number of Directors reflect the fair representation of all shareholders interests and investment. 3. Supply of Information To enable the Board to effectively discharge its duties and responsibilities, the Directors are given full, complete and unrestricted access to timely and accurate information. Prior to the meetings of the Board and Board Committees, the Directors are provided with the agenda together with the relevant reports and papers which are issued in sufficient time. The reports include changes to the Group s corporate strategies, business plans and budgets, operational and financial performance reports and updates on statutory regulations and requirements affecting the Company. In addition, there is a schedule of matters reserved specifically for the Board s decision, including the approval of corporate plans and budgets, material acquisitions and disposals of assets, major corporate exercises and changes to the control structure of the Group. Where necessary, the Directors may obtain independent professional advice whether as a full Board or in their individual capacity, in furtherance of their duties, at the Company s expense. All Directors have access to the advice and services of the Company Secretary, who regularly updates them on the latest developments in the legislations and regulatory framework affecting the Group as well as the implementation of good corporate governance and compliance practices in the Group.

9 8 I ANNUAL REPORT 2005 MERGE ENERGY BHD. ( X) Statement on Corporate Governance 4. Appointments to the Board The identification and appointment of new Directors undergo a process led by the Nomination Committee which reviews the required mix of skills, experience and other qualities of the Directors to ensure that the Board is functioning effectively and efficiently. 5. Re-election Article 105 of the Company s Articles of Association provides that one-third of the Directors shall retire from office at each Annual General Meeting and all Directors shall retire from office at least once in every three (3) years but may offer themselves for re-election. Article 112 of the Company s Articles of Association provides that any person appointed as an additional Director shall hold office only until the next following Annual General Meeting and shall then be eligible for re-election. The Directors who retire every year shall be those who have been longest in office since their last election or appointment, but as between persons who became Directors on the same day, those to retire shall be determined by lot unless they otherwise agree among themselves. 6. Directors Training In the year 2004, the Directors attended various seminars and conferences on relevant areas to further enhance their skills and knowledge and to keep abreast with the latest developments on laws and regulations under the Continuing Education Programme organised by Bursa Malaysia Securities Berhad and other organisations/ professional associations, of which the seminars and conferences are also accredited by Bursa Malaysia Securities Berhad. 7. Board Meetings The Board holds at least four (4) regularly scheduled meetings annually, with additional meetings convened when important matters demand immediate attention. Senior Management staff as well as professional advisers may be invited to attend the Board Meetings to provide the Board with their views and clarifications on issues raised by the Directors. During the financial year ended 31 January 2005, five (5) Board Meetings were held at the Board Room of the Company at No. 2 Jalan Apollo U5/190, Bandar Pinggiran Subang, Seksyen U5, Shah Alam, Selangor Darul Ehsan. The details of the meetings and attendance of each Director are set out below. Date and Time of Board Meetings Friday Wednesday Monday Monday Monday Name of Director 4.30 p.m p.m p.m a.m a.m. % Dato Muhammad Azaham bin Abdul Wahab 60 Yusof Badawi 100 Dato Tan Huat Sheng N/A* 75 Maseri bin Basirah 80 Dr Mohd Soib bin Mustakim 100 Sheah Kok Fah 80 Hew Thin Chay 80 Abd Latiff bin Ahmad 80 Notes: : Present : Absent with apologies *: Not applicable, as Dato Tan Huat Sheng had resigned on 19 December 2004

10 MERGE ENERGY BHD. ( X) ANNUAL REPORT 2005 I 9 Statement on Corporate Governance 8. Board Committees The Board has delegated certain responsibilities and duties to the Board Committees which operate within clearly defined terms of reference to assist the Board in the efficient and effective discharge of its duties. The Board Committees exercise transparency and full disclosure in their proceedings. Where applicable, issues are reported to the Board with the appropriate recommendations by the Board Committees. Audit Committee Established on 16 April 1999, the Audit Committee comprises three (3) Independent Non-Executive Directors and one (1) Executive Director. Remuneration Committee Established on 27 September 2001, the responsibilities of the Remuneration Committee are: to recommend to the Board, the remuneration of each Director in all its form, with the respective Directors abstain from deliberating their own remuneration; and to establish and review the remuneration packages of each individual Executive Director such that the levels of remuneration are sufficient to attract and retain the Directors needed to run the Group successfully. Nomination Committee Established on 27 September 2001, the Nomination Committee is entrusted with the following responsibilities: recommend to the Board, candidates for all directorships to be filled by the shareholders or the Board; consider, in making recommendations, candidates for directorships proposed by the Executive Chairman or by any other senior executive or any Director or shareholder; recommend to the Board, Directors to fill the seats on Board Committees; assess the effectiveness and balance of the Board as a whole and the Committees of the Board; assess the contribution of each individual Director; and review, at least annually, the required mix of skills and experience and other qualities, including core competencies which Non-Executive Directors should bring to the Board. During the financial year ended 31 January 2005, the Nomination Committee convened two (2) meetings. Executive Committee The Executive Committee which was established on 19 December 2003, comprises two (2) Executive Directors, the Head of Finance and Accounts and the Head of Corporate Services. During the financial year ended 31 January 2005, the Executive Committee had met eleven (11) times. Minutes of meetings and resolutions passed by the Executive Committee were tabled at the Board Meeting for notation. The objectives of the Executive Committee are: to attend and expedite all operational matters of the Company to ensure speedy processing of any issues which require immediate decisions; to improve business performance, decision making and planning; to provide assistance to the Board in fulfilling its fiduciary responsibilities in the areas relating to the Company s accounting and management controls, financial reporting, operational issues, human resources policies and company secretarial matters and in safeguarding shareholders investment and the Group s assets; and to review and formulate policies and guidelines for the approval of the Board in order to ensure smooth management and administration of the Company and thereafter to implement the policies and guidelines accordingly.

11 10 I ANNUAL REPORT 2005 MERGE ENERGY BHD. ( X) Statement on Corporate Governance DIRECTORS REMUNERATION 1. Level and Make-up of Remuneration The Group s policy on Directors remuneration is to ensure that the Directors are adequately remunerated for the services they render. The remuneration package of the Executive Directors is structured to commensurate with corporate and individual performance, seniority in service, experience and scope of responsibility. In respect of Non-Executive Directors, the fees and meeting allowances paid to them are a fair reflection of the contribution, experience and level of responsibilities undertaken for the time they spend attending to the Company s affairs. 2. Procedures The Remuneration Committee will deliberate and submit its recommendation to the Board for endorsement. The Directors play no part in deciding their own remuneration and shall abstain from discussing or voting on their own remuneration. Directors fees are approved by the shareholders at Annual General Meetings. 3. Disclosure The details of remuneration of the Directors during the financial year ended 31 January 2005 are as follows: Types of Remuneration Executive Directors Non-Executive Directors RM RM Fees 71,613 Salaries and allowances 353,928 Defined contribution plans and other employee benefits 26,498 Total 380,426 71,613 Bands of Remuneration Executive Directors Non-Executive Directors RM50,000 and below 7 RM150,001-RM200,000 1 RM200,001-RM250,000 1 SHAREHOLDERS 1. Dialogue between the Company and Investors The Company recognises the importance of being accountable to the shareholders and the public by maintaining an active and constructive communication policy that enables the Board and Management to communicate effectively with them. Feedbacks, views, concerns and queries from the shareholders and the public are welcomed. The Company ensures timely release of the Annual Report, circulars and financial results on a quarterly basis to provide an overview of the Group s performance and operations to its shareholders. The Annual General Meetings and Extraordinary General Meetings are the principal forum for dialogue with shareholders, whereby they may ask questions on the progress and performance of the Group at the question and answer session.

12 MERGE ENERGY BHD. ( X) ANNUAL REPORT 2005 I 11 Statement on Corporate Governance 2. Annual General Meeting At least twenty-one (21) days prior to the Annual General Meeting, the Annual Report will be sent to the shareholders to inform them of the financial performance and other corporate information relating to the Group. Each item of special business included in the notice of the Annual General Meeting will be accompanied by a full explanation of the effects of a proposed resolution to facilitate full understanding and evaluation of the issues involved. During the Annual General Meeting, the Board presents the financial performance of the Group. Shareholders are given the opportunity to seek and clarify any pertinent and relevant issues raised in the meeting in relation to the operations and performance of the Group and to exchange views with the Board. The Executive Directors are available to respond to shareholders questions. ACCOUNTABILITY AND AUDIT 1. Financial Reporting To produce a balanced and understandable assessment of the Group s performance and prospects in the Annual Report and financial results on a quarterly basis, the Directors implemented a quality control procedure to ensure that all financial reports are prepared based on acceptable accounting standards and policies. These financial reports undergo a review process by the Audit Committee prior to approval by the Board. The Board takes responsibility in ensuring that the financial statements reflect a true and fair view of the state of affairs of the Company and the Group in accordance with the Companies Act, 1965, the applicable approved accounting standards in Malaysia and the Listing Requirements of Bursa Malaysia Securities Berhad. 2. Internal Control The Directors acknowledge their responsibilities for the internal control system in the Group, covering not only financial control but also controls relating to operational, compliance and risk management. The system by its nature can only provide reasonable and not absolute assurance against material misstatement, loss or fraud. The Board recognizes that risks cannot be fully eliminated. As such, the systems, processes and procedures being put in place are aimed at minimizing and managing them. Ongoing reviews are continuously carried out to ensure the effectiveness, adequacy and integrity of the system of internal control in safeguarding the Group s assets. 3. Relationship with the Auditors The Internal Auditor reports to the Audit Committee and attends the Audit Committee Meetings to brief them on all control and major issues. Through the Audit Committee, the Group has established a transparent and appropriate relationship with its external auditors in seeking their professional advice towards ensuring compliance with the accounting standards. The external auditors are invited to attend the Audit Committee Meetings to brief the Audit Committee on specific issues. During the Audit Committee Meetings, they highlight observations made during the course of audit to the Audit Committee members. COMPLIANCE WITH THE CODE The Group has complied with all the best practices of corporate governance set out in Part 2 of the Code.

13 12 I ANNUAL REPORT 2005 MERGE ENERGY BHD. ( X) Directors Responsibility Statement The financial statements of the Company and the Group have been drawn up in accordance with the applicable approved accounting standards in Malaysia and the provisions of the Companies Act, 1965 so as to give a true and fair presentation of the state of affairs of the Company and the Group as at the end of the financial year and of the results and cash flows for the year then ended. In preparing these financial statements, the Directors have: adopted appropriate accounting policies and consistently applied and supported the policies by reasonable and prudent judgements and estimates; ensured that applicable accounting standards have been complied with; and prepared the financial statements on the going concern basis as the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Directors are responsible for ensuring that the Company and the Group keep proper accounting records for accurate disclosure of the financial position. The Directors also have the overall responsibilities for taking such steps as are reasonably open to them to safeguard the assets of the Group and hence, for taking reasonable steps for the prevention and detection of fraud and other irregularities.

14 MERGE ENERGY BHD. ( X) ANNUAL REPORT 2005 I 13 Audit Committee Report COMPOSITION Chairman Mr Sheah Kok Fah - Senior Independent Non-Executive Director Members Encik Yusof Badawi - Executive Director/Chief Executive Officer Mr Hew Thin Chay - Independent Non-Executive Director Encik Abd Latiff bin Ahmad - Independent Non-Executive Director MEETINGS All Audit Committee members are provided with an agenda together with the relevant reports and papers prior to the Audit Committee Meeting which are issued in sufficient time to enable the members to review the reports and papers as well as to obtain further information or explanation. Minutes of Audit Committee Meetings were tabled during Board Meetings for the Board s notation and endorsement. At each Board Meeting, the Chairman of the Audit Committee reports and highlights to the Board, all findings discussed by the Audit Committee. During the financial year ended 31 January 2005, five (5) Audit Committee Meetings were held. Details of attendance of each Audit Committee member are as follows: Date and Time of Audit Abd Latiff Committee Meetings Sheah Kok Fah Yusof Badawi Hew Thin Chay bin Ahmad Friday, 26 March p.m. Wednesday, 12 May p.m. Monday, 28 June p.m. Monday, 27 September a.m. Monday, 20 December a.m. Total Attendance % Notes: : Present : Absent with apologies

15 14 I ANNUAL REPORT 2005 MERGE ENERGY BHD. ( X) Audit Committee Report TERMS OF REFERENCE Composition The Audit Committee shall be appointed by the Board from among their number and shall consist of not less than three (3) members. The Chairman of the Committee shall be appointed by the Board. If a member of the Audit Committee ceases to be a member with the result that the number is reduced below three (3), the Board shall within three (3) months of that event, appoint such number of new members as may be required to make up the minimum number of three (3) members. The term of office for all Audit Committee members is subject to renewal on a yearly basis. The Company Secretary shall be the Secretary of the Audit Committee. Meetings The Audit Committee will meet at least four (4) times a year and such additional meetings as the Chairman shall decide in order to fulfill its duties. The quorum for a meeting shall be two (2) members and the majority of members present must be Independent Directors. The Head of Finance and Accounts, the Head of Internal Audit and a representative of the external auditors shall normally attend meetings. At least once a year the Audit Committee shall meet with the external auditors. Authority The Audit Committee is authorised by the Board to investigate any activity within its terms of reference. It is authorised to seek any information it requires from any employee and all employees are directed to co-operate with any request made by the Audit Committee. In addition, it shall have unrestricted access to both the internal and external auditors and to the Senior Management of the Group. The Audit Committee is also authorised by the Board to obtain legal or other professional advice where they consider it necessary to carry out their duties. Duties and Responsibilities (1) To review and report the following to the Board: (a) (b) (c) (d) (e) (f) (g) the audit plan with the external auditors; the audit report with the external auditors; with the external auditors, their evaluation of the system of internal controls; the assistance given by the Company s officers to the external auditors; the external auditors management letter and management s response; to discuss problems and reservations arising from the interim and final audits, and any matter the auditors may wish to discuss (in the absence of Management where necessary); the Internal Audit Department: (i) the adequacy of scope, functions and resources of the Internal Audit Department and that it has the necessary authority to carry out its work; (ii) the internal audit programme, processes, the results of the internal audit programme, processes or investigation undertaken and whether or not appropriate action is taken on the recommendations of the Internal Audit Department; (iii) any appraisal or assessment of the performance of members of the Internal Audit Department; (iv) approve any appointment or termination of senior staff members of the Internal Audit Department; (v) inform itself of resignations of internal audit staff members and provide the resigning staff member an opportunity to submit his reasons for resigning; and (vi) consider the major findings of internal investigations and Management s response;

16 MERGE ENERGY BHD. ( X) ANNUAL REPORT 2005 I 15 Audit Committee Report (h) (i) (j) (k) the quarterly results and year end financial statements, prior to the approval by the Board, focusing particularly on: (i) changes in or implementation of major accounting policy changes; (ii) significant and unusual events; (iii) the going concern assumption; (iv) significant adjustments arising from the audit; and (v) compliance with accounting standards and other legal requirements; any related party transaction and conflict of interest situation that may arise within the Company or the Group including any transaction, procedure or course of conduct that raises questions of management integrity; any letter of resignation from the external auditors of the Company; and whether there is a reason (supported by grounds) to believe that the Company s external auditors are not suitable for re-appointment. (2) To recommend the nomination of a person or persons as external auditors. (3) To carry out any such other functions as may be agreed by the Audit Committee and the Board. ACTIVITIES During the financial year ended 31 January 2005, the Audit Committee carried out the following activities: 1. Reviewed the audit plan of the external auditors on the scope of their audit including audit procedures, significant accounting and auditing issues, impact of new or proposed changes in accounting standards and regulatory requirements on the financial statements; 2. Reviewed the unaudited quarterly financial reports before tabling to the Board for approval and release to Bursa Malaysia Securities Berhad and the Securities Commission; 3. Reviewed the audited financial statements of the Group together with the external auditors prior to submission to the Board for their consideration and approval; 4. Reviewed the audit findings by the external auditors; 5. Assessed the external auditors performance and audit fees prior to submission to the Board for their approval; 6. Reviewed the Internal Audit reports which highlighted the audit issues, recommendation and the Management responses and directed actions to be taken by the Management to rectify and improve the system of internal control; 7. Followed up on corrective actions taken by the Management on audit issues raised by the external auditors and the Internal Auditor; 8. Reviewed the Statement on Internal Control and the Audit Committee Report before tabling to the Board for approval to be published in the Annual Report; 9. Reported all pertinent issues to the Board.

17 16 I ANNUAL REPORT 2005 MERGE ENERGY BHD. ( X) Audit Committee Report INTERNAL AUDIT FUNCTION The Group has established the Internal Audit Department to support the Audit Committee and the Board in reviewing the Group s system of risk management, internal control and governance process so as to provide assurance that such systems continue to operate satisfactorily and effectively. During the financial year ended 31 January 2005, the activities of the Internal Audit Department included the following: 1. Prepared the annual audit plan for deliberation by the Audit Committee; 2. Carried out audit work in liaison with the Management to optimize the use of resources and for effective coverage of audit risks; 3. Made recommendations to improve the operations in the Group; 4. Ascertained the extent of compliance with the Group s plans, policies, procedures and statutory requirements; and 5. Ascertained the adequacy of controls for safeguarding the Group s assets from losses of all kinds. The Internal Audit Department undertakes internal audit functions based on the audit plan that is reviewed and approved by the Audit Committee. The reports of the audit undertaken were presented to the Audit Committee and forwarded to the Management for attention and necessary action. EMPLOYEE SHARE OPTION SCHEME The Company did not have any Employee Share Option Scheme during the financial year.

18 MERGE ENERGY BHD. ( X) ANNUAL REPORT 2005 I 17 Statement on Internal Control RESPONSIBILITY The Board of Merge Energy Bhd. acknowledges its responsibilities and is committed to maintain a sound system of internal control and ensure its adequacy and integrity so as to safeguard shareholders investments and the Group s assets. The Board and Management have implemented a control system designed to identify and manage, rather than eliminate the risks facing the Group in pursuit of its business objectives. This internal control system, by its nature, can only provide reasonable and not absolute assurance against material misstatement or loss. INTERNAL CONTROL SYSTEM The key elements of the Group s internal control system and assurance processes are described below. Audit Committee The Audit Committee comprises a majority of Non-Executive Directors, who are also independent of the Management. It has an overall responsibility to assist the Board in fulfilling its responsibilities for the financial reporting process, the system of internal control, the audit process and the Group s process for monitoring compliance with laws and regulations. Internal Audit Department The Internal Audit Department serves as a corporate resource in support of the Audit Committee to fulfill its responsibilities. It independently reviews the control processes implemented by the Management and reports the findings and recommendations to the Audit Committee. Risk Management The Board has approved the adoption of Risk Management Policy and Framework to ensure the effective implementation of the risk management system. There is an ongoing process during the year for identifying, assessing and reviewing key risks areas faced by the Group. The parties involved include Heads of Department who among other things highlight areas of potential risk to the Management. This process is regularly reviewed by the Board with the assistance of the Executive Directors and key Management personnel. Approval of Major Decisions All major decisions require the final approval of the Board and are only made after appropriate in-depth studies have been conducted. Matters that require the Board s approval include business plans, major investments and financial decisions, awards of major contracts and changes to the Management and control structure of the Group. OTHER KEY ELEMENTS OF THE GROUP S INTERNAL CONTROL SYSTEM The other key elements of the Group s internal control system are: A management structure with clearly defined lines of responsibility and appropriate levels of delegation. The provision of regular and comprehensive information to the Board covering the Group s financial performance, key business indicators, business development issues and progress of projects. The provision of quarterly management accounts and reports to the Board for their review and approval.

19 18 I ANNUAL REPORT 2005 MERGE ENERGY BHD. ( X) Statement on Internal Control The reporting and review of operational, financial and compliance matters for all the businesses of the Group are discussed regularly at the Executive Committee (EXCO) Meetings which are attended by all Executive Directors and Senior Management of the Group. In addition, the EXCO also convenes, at the request of its members to discuss and approve matters that required immediate decisions. CONCLUSION This Statement on Internal Control has been prepared in accordance with the Guidance for Directors of Public Listed Companies and the Listing Requirements of Bursa Malaysia Securities Berhad. The Board is of the view that the system of internal control of the Group that has been put in place is adequate and effective. The Board will continue to further improve and enhance its system of internal control and the work processes so that the Group s objectives can be met. This statement is made in accordance with the resolution of the Board of Directors dated 9 May 2005.

20 MERGE ENERGY BHD. ( X) ANNUAL REPORT 2005 I 19 Other Compliance Information 1. Utilisation of Proceeds Pursuant to a corporate exercise on disposal of up to 4,003,000 ordinary shares of RM1.00 each in Merge Housing Bhd (MHB) to potential investors and/or on the open market for cash, the Group had on 14 June 2004 completed the disposal of all the MHB shares for a total consideration of RM4.79 million. The proceeds were utilized for working capital. 2. Share Buybacks The Company did not undertake any share buyback exercise during the financial year. 3. Options, Warrants or Convertible Securities No options, warrants or convertible securities were exercised during the financial year. 4. American Depository Receipt ( ADR ) or Global Depository Receipt ( GDR ) Programme The Company did not sponsor any ADR or GDR programme during the financial year. 5. Sanctions and/or Penalties There were no sanctions and/or penalties imposed on the Company and its subsidiaries, Directors or Management by the relevant regulatory bodies. 6. Non-Audit Fees Non-audit fees of RM5,000 of the Company for reviewing the Statement on Internal Control will be payable to BDO Binder, the external auditors for the financial year. 7. Variation in Results The Group s audited results for the financial year ended 31 January 2005 did not vary from the unaudited results which were announced to Bursa Malaysia Securities Berhad on 25 March Profit Guarantee The Company did not make any arrangement which required profit guarantee during the financial year. 9. Material Contracts or Loans There were no material contracts or loans entered into by the Group during the financial year that involve Directors or major shareholders interests. 10. Revaluation Policy on Landed Properties The Group has not adopted a policy of regular revaluation on property, plant and equipment. 11. Recurrent Related Party Transactions The Company did not enter into any significant recurrent related party transaction which requires shareholders mandate during the financial year.

21 20 I ANNUAL REPORT 2005 MERGE ENERGY BHD. ( X) Directors Report The Directors hereby submit their report together with the audited financial statements of the Group and of the Company for the financial year ended 31 January PRINCIPAL ACTIVITIES The Company is principally engaged in investment holding. The principal activities of the subsidiary companies are set out in Note 7 to the financial statements. There have been no significant changes in the nature of these activities during the financial year. RESULTS Group RM Company RM Net loss for the financial year 1,038,799 1,252,886 DIVIDENDS No dividend has been paid or declared by the Company since the end of the previous financial year. The Directors do not recommend any dividend in respect of the financial year ended 31 January RESERVES AND PROVISIONS There were no material transfers to or from reserves or provisions during the financial year other than those disclosed in the financial statements. ISSUE OF SHARES AND DEBENTURES The Company has not issued any new shares or debentures during the financial year. DIRECTORS The Directors who held office since the date of the last report are: Dato Muhammad Azaham Bin Abdul Wahab Yusof Badawi Maseri Bin Basirah Dr Mohd Soib Bin Mustakim Sheah Kok Fah Hew Thin Chay Abd Latiff Bin Ahmad Dato Tan Huat Sheng (resigned on 19 December 2004) In accordance with Article 105 of the Company s Articles of Association, Dr Mohd Soib Bin Mustakim and Mr. Hew Thin Chay will retire from the Board by rotation at the forthcoming Annual General Meeting and, being eligible, offer themselves for re-election.

22 MERGE ENERGY BHD. ( X) ANNUAL REPORT 2005 I 21 Directors Report DIRECTORS INTERESTS The Directors holding office at the end of the financial year and their beneficial interests in the ordinary shares of the Company and its related corporations during the financial year ended 31 January 2005, as recorded in the Register of Directors Shareholdings kept by the Company under Section 134 of the Companies Act, 1965 were as follows: --- Number of ordinary shares of RM1.00 each --- Balance Balance as at as at Shares in the Company Bought Sold Direct interests: Maseri Bin Basirah 10,000,000 10,000,000 Dr Mohd Soib Bin Mustakim 8,000,000 8,000,000 Indirect interests: Dato Muhammad Azaham Bin Abdul Wahab 5,000,000 3,000,000 8,000,000 Yusof Badawi 5,000,000 3,000,000 8,000,000 Other than as disclosed above, none of the other Directors who held office at the end of the financial year had any share or beneficial interests in the shares of the Company and its related corporations. DIRECTORS BENEFITS Since the end of the previous financial year, none of the Directors have received or become entitled to receive any benefits (other than benefits included in the aggregate amount of emoluments received or due and receivable by the Directors shown in the financial statements) by reason of a contract made by the Company or a related corporation with the Director, or with a firm of which the Director is a member, or with a company in which the Director has a substantial financial interest. There were no arrangements during and at the end of the financial year, to which the Company is a party, which had the object of enabling Directors of the Company to acquire benefits by means of the acquisition of shares in or debentures of the Company or any other body corporate. OTHER STATUTORY INFORMATION REGARDING THE GROUP AND THE COMPANY: (I) AS AT THE END OF THE FINANCIAL YEAR (a) Before the income statements and balance sheets of the Group and of the Company were made out, the Directors took reasonable steps: (i) (ii) to ascertain that proper action had been taken in relation to the writing off of bad debts and the making of provision for doubtful debts and have satisfied themselves that all known bad debts had been written off and that adequate provision had been made for doubtful debts; and to ensure that any current assets which were unlikely to realise their book values in the ordinary course of business had been written down to their estimated realisable values. (b) In the opinion of the Directors, the results of the operations of the Group and of the Company during the financial year have not been substantially affected by any item, transaction or event of a material and unusual nature.

23 22 I ANNUAL REPORT 2005 MERGE ENERGY BHD. ( X) Directors Report OTHER STATUTORY INFORMATION REGARDING THE GROUP AND THE COMPANY (cont d) (II) FROM THE END OF THE FINANCIAL YEAR TO THE DATE OF THIS REPORT (c) The Directors are not aware of any circumstances: (i) (ii) which would render the amount written off for bad debts or the amount of the provision for doubtful debts in the financial statements of the Group and of the Company inadequate to any material extent; or which would render the values attributed to the current assets in the financial statements of the Group and of the Company misleading; and (iii) which have arisen which would render adherence to the existing method of valuation of assets or liabilities of the Group and of the Company misleading or inappropriate. (d) In the opinion of the Directors: (i) (ii) there has not arisen any item, transaction or event of a material and unusual nature likely to affect substantially the results of the operations of the Group and of the Company for the financial year in which this report is made; and no contingent or other liability has become enforceable, or is likely to become enforceable, within the period of twelve months after the end of the financial year which will or may affect the abilities of the Group and of the Company to meet their obligations as and when they fall due. (III) AS AT THE DATE OF THIS REPORT (e) (f) (g) There are no charges on the assets of the Group and of the Company which have arisen since the end of the financial year to secure the liabilities of any other person. There are no contingent liabilities of the Group and of the Company which have arisen since the end of the financial year. The Directors are not aware of any circumstances not otherwise dealt with in the report or financial statements which would render any amount stated in the financial statements of the Group and of the Company misleading.

24 MERGE ENERGY BHD. ( X) ANNUAL REPORT 2005 I 23 Directors Report SIGNIFICANT EVENTS The significant events are disclosed in Note 38 to the financial statements. AUDITORS The auditors, BDO Binder, have expressed their willingness to continue in office. Signed on behalf of the Board of Directors in accordance with a resolution of the Directors.... DATO MUHAMMAD AZAHAM BIN ABDUL WAHAB Director... YUSOF BADAWI Director Shah Alam 9 May 2005

25 24 I ANNUAL REPORT 2005 MERGE ENERGY BHD. ( X) Statement by Directors In the opinion of the Directors, the financial statements set out on pages 26 to 60 have been drawn up in accordance with applicable approved accounting standards in Malaysia so as to give a true and fair view of: (i) the state of affairs of the Group and of the Company as at 31 January 2005 and of their results for the financial year then ended; and (ii) the cash flows of the Group and of the Company for the financial year ended 31 January On behalf of the Board,... DATO MUHAMMAD AZAHAM BIN ABDUL WAHAB Director... YUSOF BADAWI Director Shah Alam 9 May 2005 Statutory Declaration I, Dato Muhammad Azaham Bin Abdul Wahab, being the Director primarily responsible for the financial management of Merge Energy Bhd., do solemnly and sincerely declare that the financial statements set out on pages 26 to 60 are, to the best of my knowledge and belief, correct and I make this solemn declaration conscientiously believing the same to be true and by virtue of the provisions of the Statutory Declarations Act, Subscribed and solemnly ) declared by the abovenamed at ) Kuala Lumpur this 9 May 2005 ) DATO MUHAMMAD AZAHAM BIN ABDUL WAHAB Before me: P. SETHURAMAN (W-217) Pesuruhjaya Sumpah Kuala Lumpur