Building New Heights MERGE ENERGY BHD (420099X) ANNUAL REPORT 2007

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1 No. 2 Jalan Apollo U5/190, Bandar Pinggiran Subang, Seksyen U5, Shah Alam, Selangor Darul Ehsan Tel : Fax : / mergebhd@streamyx.com MERGE ENERGY BHD (420099X) ANNUAL REPORT 2007 Building New Heights

2 Upper stream of Sungai Selangor at Gerachi, Kuala Kubu Bharu.

3 ABOUT US Corporate Information Profile of Directors Financial Highlights Executive Chairman s Statement Corporate Structure Statement on Corporate Governance Directors Responsibility Statement Audit Committee Report Statement on Internal Control Other Compliance Information Corporate Social Responsibility Financial Statements List of Properties Analysis of Shareholdings Notice of Annual General Meeting Appendix A Proxy Form COVER RATIONALE Building New Heights The visual depicts Merge Energy as a progressive organisation, building on its existing strength to achieve new heights in construction with specific focus in the waterworks sector. In line with the focus in waterworks, the visual also extends this message via the colour blue, which aptly signifies water. Water also gives life to all living things. Blue is calming. It can be strong and steadfast or light and friendly, and conveys importance and confidence. With all these elements fused together, Merge Energy is certainly all about Building New Heights - in every possible way.

4 2 CORPORATE INFORMATION ANNUAL REPORT 2007 MERGE ENERGY BHD X BOARD OF DIRECTORS Dato Muhammad Azaham bin Abdul Wahab Executive Chairman Encik Yusof Badawi Executive Director/Chief Executive Officer Haji Mat Anuar bin Hasan Executive Director, Operations AUDIT COMMITTEE Chairman Mr Sheah Kok Fah Members Encik Yusof Badawi Haji Mat Anuar bin Hasan Encik Abd Latiff bin Ahmad Encik Tahirruddin 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 EXECUTIVE COMMITTEE Chairman Dato' Muhamad Azaham bin Abdul Wahab Dr Mohd Soib bin Mustakim Non-Independent Non-Executive Director Mr Sheah Kok Fah Senior Independent Non-Executive Director Encik Abd Latiff bin Ahmad Independent Non-Executive Director Encik Tahirruddin bin Ahmad Independent Non-Executive Director REGISTERED OFFICE AND BUSINESS ADDRESS No. 2 Jalan Apollo U5/190 Bandar Pinggiran Subang Seksyen U Shah Alam Selangor Darul Ehsan Tel : Fax : / mergebhd@streamyx.com 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 PRINCIPAL BANKERS Bank Muamalat Malaysia Berhad (6175-W) Affin Bank Berhad (25046-T) Citibank Berhad ( M) Members Encik Yusof Badawi Haji Mat Anuar bin Hasan Puan Raizita binti Harun COMPANY SECRETARY Ms Yoong Wai Ling (MAICSA ) STOCK EXCHANGE LISTING Bursa Malaysia Securities Berhad Construction Sector, Main Board

5 PROFILE OF DIRECTORS 3 MERGE ENERGY BHD X DATO MUHAMMAD AZAHAM BIN ABDUL WAHAB Aged 67 Malaysian Executive Chairman Dato Muhammad Azaham was appointed to the Board on 3 January He graduated from the University of Malaya in 1966 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 and acquired extensive management experience in the middle and upper echelon of management. Subsequently, he resigned and ventured into business. He has more than 24 years of experience in the construction and property development industry and has served in listed and non-listed companies involved in construction and property development. Azaham was instrumental in the development of housing projects in Wilayah Persekutuan, Selangor, Pulau Pinang, Johor, Negeri Sembilan and Pahang. He had served in another public listed construction and development company. Dato Muhammad Azaham is the Executive Chairman and substantial shareholder of Jalur Cahaya Sdn Bhd, a company involved in municipal solid waste management. Jalur Cahaya Sdn Bhd is also one of the biggest non-revenue water contractor in Selangor and Wilayah Persekutuan. Dato Muhammad Azaham is active in consumer affairs and has served as a member of the National Consumers Consultative Council, Ministry of Trade and Industry. He was active in the youth movement and was the President of the Malaysian and Asian Youth Council. He was also active in politics and has served in the branch and division of UMNO and currently he is the Head of UMNO Cawangan Pemancar in Pulau Pinang. He has co-authored a book titled The Malays Par Excellence Warts and All. ANNUAL REPORT 2007 As the General Manager of Syarikat Perumahan Pegawai Kerajaan Sdn Bhd, Dato Muhammad Dato' Muhammad Azaham is the Chairman of the Executive Committee.

6 4 profile of directors ANNUAL REPORT 2007 MERGE ENERGY BHD X HAJI MAT ANUAR BIN HASAN Aged 54 Malaysian Executive Director, Operations ENCIK YUSOF BADAWI Aged 45 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 20 years of experience in the construction industry at various levels including senior and board level. He has been actively involved in management and implementation of various construction, infrastructure, housing development, waterworks and maintenance projects. He was involved in the construction, testing and commissioning of Sungai Selangor Water Supply Scheme Phase I and Phase II from 1990 to He has also successfully managed the implementation of the RM500 million contract for the maintenance and upgrading of schools in Peninsular Malaysia under the umbrella concept for the Ministry of Education. As Chief Executive Officer of Merge Energy Bhd and Executive Director of all its subsidiaries, he plans, manages and oversees the operation of the Group. Encik Yusof is also director and shareholder of few other private limited companies. Encik Yusof is a member of the Audit Committee and Executive Committee. Haji Mat Anuar was appointed to the Board on 1 February He graduated with a Bachelor of Science in Civil Engineering from the Polytechnic of Central London and a Diploma in Civil Engineering from Universiti Teknologi Malaysia. Haji Mat Anuar has 26 years of experience in public works and the water supply sector. He had held senior positions in government agencies which include Jabatan Kerja Raya, Ministry of Transport and Jabatan Bekalan Air, Selangor. He was involved in the planning and implementation of Government projects such as buildings, roads, airports, ports and water supply systems. He has also managed the maintenance of Government buildings, roads and water supply systems. Haji Mat Anuar also had experience in the non-revenue water projects, where he has supervised the implementation of non-revenue water projects in Jabatan Bekalan Air Wilayah Kuala Lumpur and Wilayah Petaling. Haji Mat Anuar is a member of the Audit Committee and Executive Committee.

7 profile of directors 5 DR MOHD SOIB BIN MUSTAKIM Aged 50 Malaysian Non-Independent Non-Executive Director Dr Mohd Soib was appointed to the Board on 18 November He graduated with a Bachelor of Science from the Open International University. Dr Mohd Soib was a training officer at the Rubber Industry Smallholders Development Authority (RISDA) from and at Kementerian Pertahanan Malaysia, Bahagian Hal-Ehwal Bekas Perajurit from He has been a practitioner in complimentary medicines since Dr Mohd Soib is a member of the Remuneration Committee and Nomination Committee. MERGE ENERGY BHD X MR SHEAH KOK FAH Aged 43 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 Mr Sheah is the Chairman of the Audit Committee, Remuneration Committee and Nomination Committee. ANNUAL REPORT 2007

8 6 profile of directors ENCIK ABD LATIFF BIN AHMAD Aged 50 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. ANNUAL REPORT 2007 MERGE ENERGY BHD X ENCIK TAHIRRUDDIN BIN AHMAD Aged 54 Malaysian Independent Non-Executive Director Encik Tahirruddin was appointed to the Board on 14 October He is a member of the Malaysian Institute of Accountants and Fellow of Chartered and Certified Accountants of United Kingdom. Encik Tahirruddin has 20 years of experience in financial and accounting matters in the civil service, of which he started as an accountant with Jabatan Akauntan Negara in 1976 and then as Deputy Director of Audit and Accounts in the Cooperative Department of Malaysia. From , he was the State Treasurer with the Selangor State Treasury before he was seconded to RMN Dockyard in Lumut, Perak as its first Finance Manager. In 1983, he joined Perak State Economic Development Corporation in Ipoh as the Head of Finance and Administration. Subsequently, from , he was offered to join Permodalan Perak Berhad as its Managing Director, which was later restructured for listing on the Main Board of Bursa Malaysia Securities Berhad as KUB Malaysia. Currently, he is managing his own business. 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). In 1988, he held the position of senior legal officer in Employees Provident Fund (EPF) before venturing into the private practice. Encik Abd Latiff is a member of the Audit Committee, Remuneration Committee and Nomination Committee. Encik Tahirruddin is a member of the Audit 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.

9 FINANCIAL HIGHLIGHTS 7 AUDITED Revenue (RM'000) 200,487 90,285 16,812 4,918 12,721 Profit/(Loss) Before Taxation (RM'000) 19,818 5,584 (1,033) (5,538) (25,921) Net Assets (RM'000) 31,035 10,524 5,712 6,750 12,289 Net Assets Per Share (RM) Revenue (RM'000) Profit/(Loss) Before Taxation (RM'000) MERGE ENERGY BHD X 250,000 30, , , ,000 50,000 20,000 10, ,000-20,000 ANNUAL REPORT , Net Assets (RM'000) Net Assets Per Share (RM) 35,000 30,000 25,000 20,000 15,000 10,000 5,

10 8 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 ANNUAL REPORT 2007 MERGE ENERGY BHD X FINANCIAL PERFORMANCE Merge Energy has delivered another year of excellent results and achievements. For the financial year ended 31 January 2007, we took the Group to a greater level of success in revenue and profit. We are proud to maintain high standards of accountability and corporate governance by keeping abreast on latest developments in corporate transparency. For this financial year, we had prepared our financial statements using the new Financial Reporting Standards (FRS). Merge Energy had a strong year in For the financial year ended 31 January 2007, the Group recorded a revenue of RM million, a 122% increase over the preceding year of RM90.28 million and profit after taxation of RM19.78 million against RM4.99 million in the preceding year. On the back of an improved profit, earnings per share rose to sen and total net assets valued at RM31.03 million. We will continue to strive for excellence in line with our theme of Building New Heights, as portrayed in our Annual Report this year. The Group s performance for the financial year under review improved in tandem with higher revenue generated from projects secured and implemented. During the year, we obtained one major contract, namely the Upgrading of Existing 26 Water Treatment Plants in Selangor. To meet future challenges, we will continue to improve our productivity and operational efficiency. CORPORATE DEVELOPMENT On 8 May 2006, the Company announced to Bursa Malaysia Securities Berhad (Bursa Securities) that it became an affected listed issuer pursuant to the Amended Practice Note No. 17/2005 (PN17) of the Listing Requirements of Bursa Securities. The Company falls under PN17 due to its shareholders funds (based on its audited accounts as at 31 January 2006) being less than 25% of its issued and paid up capital and less than the minimum issued and paid up capital requirement for a Main Board company, which is at RM60 million.

11 executive chairman s statement 9 On 25 September 2006, the Company announced a proposal on the acquisition of Suasa Efektif (M) Sdn Bhd (SESB), a company engaged in managing, maintaining and operating parking facilities of seven municipal councils in the state of Selangor Darul Ehsan for a total purchase consideration of RM46.9 million, to be fully satisfied by Merge Energy Bhd. shares. The proposed acquisition of SESB will help provide a steady stream of income to the Company and increase the Company s shareholders funds to more than RM60 million, thus regularising its financial condition to enable the Company to address being classified under PN17. INDUSTRY REVIEW Bank Negara Malaysia announced that the construction sector is expected to grow by 3% in 2007, after having experienced a contraction in the last few years. The construction sector would benefit from higher public expenditure in the Ninth Malaysia Plan (9MP). The 9MP which included new infrastructure and development projects and related activities would be a catalyst for the construction sector. Besides the Government s allocation, projects initiated through privately financed initiatives are also expected to be quite significant. The Government has made it clear that the private sector will be the main growth catalyst going forward and this should result in more spinoffs from private sector driven projects. The Government s full support for the construction industry is vital because construction in any country is a key driver to economic growth and would have a significant multiplier effect across supporting sectors. The allocation of RM11 billion in the 9MP for the water and sewerage infrastructure works by the Government will create greater prospects and more opportunities for the Company as it has vast experience in this sub-sector. PROSPECTS The Group is committed to focus on growth and expansion by exploring opportunities especially in the waterworks construction sector where our strength and capabilities are. Continuous effort will be taken to secure more contracts to improve the Group s performance to further enhance and strengthen our business which will propel our growth to greater heights. APPRECIATION On behalf of the Board, I would like to record our appreciation to Encik Maseri bin Basirah who resigned as a Director on 28 February 2007, for his invaluable services rendered during his tenure of service. I also wish to welcome Haji Mat Anuar bin Hasan who was appointed to the Board as Executive Director, Operations on 1 February 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 for their commitment and drive in contributing to the growth and achievement of the Group. To my esteemed colleagues on the Board, my thanks and gratitude for your commitment, guidance and support during the year. Dato Muhammad Azaham bin Abdul Wahab Executive Chairman 15 June 2007 MERGE ENERGY BHD X ANNUAL REPORT 2007

12 10 CORPORATE STRUCTURE CONSTRUCTION Mewah Kota Sdn. Bhd. Paramount Ventures Sdn. Bhd. Merge Highway Engineering Sdn. Bhd. TRADING & MANUFACTURING Merge Environmental Engineering Sdn. Bhd. Merge Trading Sdn. Bhd. Merge Readymix Sdn. Bhd. REALTY MEB Realty Sdn. Bhd. Merge Concrete Technologies Sdn. Bhd. Merge Properties Sdn. Bhd. MEB Development Sdn. Bhd. Merge Properties Management Services Sdn. Bhd. MEB Management Sdn. Bhd. The above companies are all wholly-owned subsidiaries of Merge Energy Bhd.

13 STATEMENT ON CORPORATE GOVERNANCE 11 The Board of Directors recognises the importance of good corporate governance and is committed to ensure that the highest standards of corporate governance are practised throughout the Group, as set out in the Malaysian Code on Corporate Governance (the Code). The Board continues to encourage professionalism, integrity and good governance as the corporate culture and way forward for the Group to provide an environment for good performance by its people and better returns to shareholders. 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. 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 and operational performance, critical business issues, resources and standards of conduct. The Directors are professionals from diverse backgrounds with a wide range of experience which enable them to direct and manage the business and affairs of the Group with broader perspectives. 2. Board Balance The Board consists of seven members, comprising three Executive Directors and four Non-Executive Directors. Among the Non-Executive Directors, three 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 stakeholders interests and investment. MERGE ENERGY BHD X ANNUAL REPORT 2007 STAKEHOLDERS Remuneration Committee Board of Directors Audit Committee Executive Committee Management Committee Nomination Committee

14 12 statement on corporate governance ANNUAL REPORT 2007 MERGE ENERGY BHD X 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 Group. 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. 4. Appointments to the Board 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. 6. Directors Training The Directors have attended various seminars and conferences such as corporate financial reporting, corporate governance, risk management, corporate planning, internal audit and taxation organised by the various training providers. The Directors will continue to undergo other seminars and conferences to further enhance their skills and knowledge and to keep abreast with the latest developments on laws and regulations. 7. Board Meetings The Board holds at least five regularly scheduled meetings annually, with additional meetings convened when important matters demand immediate attention. Senior Management staff as well as professional advisers have been 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 2007, six Board Meetings were held. Details of attendance of each Director are as follows: 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 years but may offer themselves for re-election. Name of Director Dato' Muhammad Azaham bin Abdul Wahab No. of Meetings Attended 4/6 Yusof Badawi 6/6 Maseri bin Basirah* 6/6 Dr Mohd Soib bin Mustakim 6/6 Sheah Kok Fah 4/6 Abd Latif bin Ahmad 6/6 Tahirruddin bin Ahmad 5/6 *Encik Maseri bin Basirah resigned as Director on 28 February 2007.

15 statement on corporate governance 13 In between Board Meetings, approvals on matters requiring the sanction of the Board are sought by way of circular resolutions enclosing all relevant information to enable the Board to make informed decisions. 8. Committees The Board has delegated certain responsibilities and duties to the following Committees to assist the Board in the efficient and effective discharge of its duties. Meetings of the Board Committees provide an avenue for members of the respective Committees to focus on specific issues to enable full and in-depth discussion of business operations of the Group. (a) Audit Committee Established on 16 April 1999, the Audit Committee comprises three Independent Non-Executive Directors and two Executive Directors. The Audit Committee Report is set out on pages 17 to 20 of this Annual Report. (b) 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. (c) 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; and assess the effectiveness and balance of the Board as a whole and the Committees of the Board. During the financial year ended 31 January 2007, the Nomination Committee convened two meetings to: propose the re-election of Directors retiring in accordance with the Company s Articles of Association at the Ninth Annual General Meeting held on 27 June 2006; review the responsibilities of the Nomination Committee; propose the appointment of Haji Mat Anuar bin Hasan as a new member to the Board, Audit Committee and Executive Committee. (d) Executive Committee Established on 19 December 2003, the Executive Committee met 13 times during the financial year ended 31 January 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 Group to ensure speedy processing of any issue which require immediate decisions; to improve business performance and decision making; to provide assistance to the Board in fulfilling its fiduciary responsibilities in the areas relating to the Group 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; MERGE ENERGY BHD X ANNUAL REPORT 2007

16 14 statement on corporate governance ANNUAL REPORT 2007 MERGE ENERGY BHD X to review and formulate policies and guidelines for the approval of the Board in order to ensure smooth management and administration of the Group and thereafter to implement the policies and guidelines accordingly; and to evaluate and recommend investment opportunities for the approval of the Board. 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, experience and scope of responsibility. Non-Executive Directors are paid fees which will be approved by the shareholders and attendance allowances to board and board committee meetings. 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 2007 are as follows: Types of Remuneration Executive Directors RM Non- Executive Directors RM Fees - 60,000 Salaries, allowances and bonus Defined contribution plan and other employee benefits 263,422-28,882 - Total 292,304 60,000 Bands of Remuneration Executive Directors Non- Executive Directors RM50,000 and below - 5 RM50,001-RM100, RM200,001-RM250, SHAREHOLDERS 1. Dialogue between the Company and Investors The Board acknowledges the need for shareholders to be informed of all material business and developments concerning the Group. In addition to various announcements made during the year, the timely release of financial results on a quarterly basis provides shareholders with an overview of the Group s performance and operations. The Annual Reports, announcements, circulars to shareholders and financial results are pivotal means of communication with shareholders. The Annual General Meetings and Extraordinary General Meetings provide the opportunities for interaction among Directors and shareholders. Issues pertaining to the Annual Reports, circulars to shareholders and performance and progress of the Group could be raised and explained in these meetings.

17 statement on corporate governance Annual General Meeting At least 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. ACCOUNTABILITY AND AUDIT 1. Financial Reporting The Group s performance and prospects in the Annual Report and financial results on a quarterly basis, prepared based on appropriate Financial Reporting Standards and accounting policies, will be reviewed and deliberated by the Audit Committee prior to recommendation for adoption by the Board. 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. 3. Relationship with the Auditors 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 Financial Reporting 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 table the audit planning and 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. MERGE ENERGY BHD X ANNUAL REPORT 2007 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 Financial Reporting Standards in Malaysia and the Listing Requirements of Bursa Malaysia Securities Berhad. 2. Internal Control The Board acknowledges its responsibility for establishing a sound system of internal control to safeguard shareholders investment and the Group s assets. While the internal control system is devised to cater for particular needs of the Group and the risks to which it is exposed, such controls by their nature can only provide reasonable assurance and not absolute assurance against material misstatement, loss or fraud.

18 16 DIRECTORS RESPONSIBILITY STATEMENT The financial statements of the Company and the Group have been drawn up in accordance with the applicable approved Financial Reporting 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. ANNUAL REPORT 2007 MERGE ENERGY BHD X 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 Financial Reporting 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 to take all steps as are reasonably open to them to safeguard the assets of the Group to prevent and detect fraud and other irregularities.

19 AUDIT COMMITTEE REPORT 17 COMPOSITION Chairman Mr Sheah Kok Fah - Senior Independent Non-Executive Director Members Encik Yusof Badawi - Executive Director/Chief Executive Officer Haji Mat Anuar bin Hasan - Executive Director, Operations Encik Abd Latiff bin Ahmad - Independent Non-Executive Director Encik Tahirruddin bin Ahmad - Independent Non-Executive Director MEETINGS All Audit Committee members are provided with an agenda together with relevant reports and papers which are issued in sufficient time prior to the Audit Committee Meeting 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 2007, six Audit Committee Meetings were held. Details of attendance of each Audit Committee member are as follows: 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 members. The majority of the Audit Committee members must be Independent Directors and at least one of the members must be a qualified accountant as prescribed by Bursa Malaysia Securities Berhad Listing Requirements. The Chairman of the Committee shall be appointed by the Board and shall be an Independent Director. In the event of any vacancy in the Audit Committee resulting in the non-compliance of the above requirements, the vacancy shall be filled within three months. MERGE ENERGY BHD X ANNUAL REPORT 2007 Name of Audit Committee Members No. of Meetings Attended Sheah Kok Fah 6/6 Yusof Badawi 6/6 Haji Mat Anuar bin Hasan * - Abd Latiff bin Ahmad 5/6 Tahirruddin bin Ahmad 5/6 All members of the Audit Committee, including the Chairman, shall hold office only so long as they serve as Directors of the Company. Should any member of the Audit Committee cease to be a Director of the Company, his membership in the Audit Committee would cease forthwith. * Haji Mat Anuar bin Hasan was appointed as an Audit Committee member on 1 February 2007.

20 18 audit committee report ANNUAL REPORT 2007 MERGE ENERGY BHD X Meetings The Audit Committee shall meet at least four 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 members and the majority of members present must be Independent Directors. The Head of Finance and Administration, the Head of Internal Audit and representative(s) of the external auditors shall normally attend meetings. At least twice a year the Audit Committee shall meet with the external auditors. The Company Secretary shall be the Secretary of the Audit Committee. Minutes of meetings shall be distributed to the Board. The Chairman shall report on each meeting to the Board. 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 cooperate 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 the quarterly results and year end financial statements, prior to the approval by the Board, focusing particularly on: (iv) (v) significant adjustments arising from the audit; and compliance with Financial Reporting Standards and other legal requirements. 2. To review with the external auditors, the following: (i) (ii) (iii) (iv) (v) (vi) the audit plan; the audit report; their evaluation of the system of internal controls; problems and reservations arising from their interim and final audits, and any matter the external auditors may wish to discuss (in the absence of Management where necessary); the assistance given by the Company s officers to the external auditors; and the external auditors management letter and Management s response. 3. To do the following in respect of internal audit functions: (i) (ii) review the adequacy of the scope, functions and resources of the Internal Audit Department and that it has the necessary authority to carry out its work; review 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; and (iii) consider the findings of internal investigations and Management s response. (i) (ii) (iii) changes in or implementation of major accounting policy changes; significant and unusual events; the going concern assumption;

21 audit committee report To consider 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. 5. To review: (i) (ii) (iii) any letter of resignation from the external auditors of the Company; whether there is a reason (supported by grounds) to believe that the Company s external auditors are not suitable for reappointment; any recommendation on the nomination of a person or persons as external auditors. 6. To carry out other functions as may be agreed by the Audit Committee and the Board. ACTIVITIES During the financial year ended 31 January 2007, 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 Financial Reporting 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 annual audit plan presented by the internal auditor; 7. 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 improve the system of internal control; 8. Followed up on corrective actions taken by the Management on audit issues raised by the external auditors and the internal auditor; 9. 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; 10. Reported all pertinent issues to the Board. 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 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 2007, the activities of the Internal Audit Department included: 1. Prepared the annual audit plan based on risk approach method for deliberation by the Audit Committee; 2. Carried out audit work in liaison with the Management for optimisation of resources; 3. Made recommendations to improve the operations in the Group; MERGE ENERGY BHD X ANNUAL REPORT 2007

22 20 audit committee report ANNUAL REPORT 2007 MERGE ENERGY BHD X 4. Ascertained the extent of compliance with the Group s plans, policies, procedures and statutory requirements; 5. Ascertained the adequacy of controls for safeguarding the Group s assets from losses of all kinds; 6. Reviewed and appraised the soundness, adequacy and application of financial and other controls to promote effective control in the Group. 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.

23 STATEMENT ON INTERNAL CONTROL 21 RESPONSIBILITY Risk Management The Board 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 an internal 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, loss or fraud. INTERNAL CONTROL SYSTEM The key elements of the Group s internal control system and assurance processes are described below. 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 by the Management for communication to the Board. 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, awards of major contracts, major investments and financial decisions. MERGE ENERGY BHD X Independent 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. ANNUAL REPORT 2007 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.

24 22 statement on internal control ANNUAL REPORT 2007 MERGE ENERGY BHD X 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 clear defined lines of responsibility and appropriate levels of delegation. Internal policies and control procedures are in place to regulate financial and operating activities. 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. 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 the EXCO members. In addition, the EXCO also convenes, at the request of its members to discuss and approve matters that require 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 25 May The holding of monthly Management Committee Meetings (MCM) are attended by Executive Directors, Senior Management and Heads of Department to discuss and resolve, where necessary on the Group s operational matters.

25 OTHER COMPLIANCE INFORMATION Utilisation of Proceeds 8. Profit Guarantee The proceeds of RM1,000,000 from the disposal of two properties held under Lot , Geran No and Lot , Geran No in Bandar Alor Setar, Daerah Kota Setar, Kedah Darul Aman on 9 October 2006 were utilised 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 The Company has not issued any options, warrants or convertible securities in 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 For the financial year, the following non-audit fees will be payable to BDO Binder, the external auditors and their affiliated companies: (i) Reviewing the Statement on Internal Control RM5,000 (ii) Tax advisory services RM15,300 (iii) Corporate exercise RM120, Variation in Results The Group s audited results for the financial year ended 31 January 2007 did not vary by 10% or more from the unaudited results which were announced to Bursa Malaysia Securities Berhad on 30 March The Company did not make any arrangement which required profit guarantee during the financial year. 9. Material Contracts or Loans Being an affected listed issuer pursuant to the Amended Practice Note No. 17/2005 (PN17) of the Listing Requirements of Bursa Malaysia Securities Berhad, on 25 September 2006, the Company entered into a conditional Sale and Purchase Agreement with Sejahtera Fitrah Sdn Bhd (SFSB) and Al-Mudharib Niaga Sdn Bhd to acquire Suasa Efektif (M) Sdn Bhd (SESB), a company engaged in managing, maintaining and operating parking facilities of seven municipal councils in the state of Selangor Darul Ehsan for a total purchase consideration of RM46.9 million, to be fully satisfied by Merge Energy Bhd. shares (Proposed Acquisition). Encik Yusof Badawi is deemed interested in the Proposed Acquisition by virtue of his direct interest in Desa Binapuri Sdn Bhd (DBSB), being a substantial shareholder of Merge Energy Bhd. and SFSB. Dato Muhammad Azaham bin Abdul Wahab is also deemed interested in the Proposed Acquisition by virtue of his direct interest in DBSB and him being a party acting in concert to Encik Yusof Badawi. Therefore, Encik Yusof Badawi and Dato Muhammad Azaham bin Abdul Wahab, being the Directors of Merge Energy Bhd., are deemed interested in the Proposed Acquisition. There were no material 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 landed properties. 11. Recurrent Related Party Transactions The Group did not enter into any significant recurrent related party transactions which require shareholders mandate during the financial year. MERGE ENERGY BHD X ANNUAL REPORT 2007

26 24 CORPORATE SOCIAL RESPONSIBILITY ANNUAL REPORT 2007 MERGE ENERGY BHD X Merge Energy Bhd. Group is committed in maintaining awareness on health, safety and environmental aspects by promoting safe work practices to all employees, contractors and the public. Concerted efforts are continually made to create awareness on the collective responsibility among its employees for the prevention of injuries and occupational health hazards and the assurance of public safety when carrying out its business activities. As a responsible organisation, we ensured the health and safety of all parties are duly taken care of at project sites by: sending staff and contractors to attend courses on health, safety, security and environment to instill a safety awareness in them; implementing periodical safety performance audit at all project sites; putting up safety signages at project sites; using protective equipment at the workplace; and investigating any untoward incidences. The Group emphasised continuing relationship with the employees and their families. To maintain good relationship with the employees and their families, Kelab Sukan dan Kebajikan Merge Energy organised an annual dinner together with a family day outing to Port Dickson in December Telematches and games were held for everyone to participate to inculcate a spirit of togetherness. In appreciation of employees' loyalty, long service awards were also presented during the annual dinner. Besides, the Group also visited staff or their family members who were hospitalized, celebrated staff s birthday, newborn babies and wedding, organised monthly staff meeting and rendered assistance to staff affected by disasters, for example fire and flood. It is essential to retain employees of calibre through attractive employee benefits programmes such as comprehensive insurance coverage, interest-free education loan for employees children and medical benefits that cover outpatient treatment, hospitalisation, surgical and maternity expenses for employees, their spouses and children.

27 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 FINANCIAL STATEMENTS

28 26 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. ANNUAL REPORT 2007 MERGE ENERGY BHD X RESULTS Group RM Company RM Net profit/(loss) for the financial year 19,777,858 (1,017,384) 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 payment of 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.

29 directors' report 27 DIRECTORS The Directors who held office since the date of the last report are: Dato Muhammad Azaham Bin Abdul Wahab Yusof Badawi Dr Mohd Soib Bin Mustakim Sheah Kok Fah Abd Latiff Bin Ahmad Tahirruddin Bin Ahmad Haji Mat Anuar Bin Hasan (Appointed on 1 February 2007) Maseri Bin Basirah (Resigned on 28 February 2007) In accordance with Article 105 of the Company s Articles of Association, Yusof Badawi and Sheah Kok Fah retire from the Board by rotation at the forthcoming Annual General Meeting and, being eligible, offer themselves for reelection. In accordance with Article 112 of the Company s Articles of Association, Haji Mat Anuar Bin Hasan retires from the Board at the forthcoming Annual General Meeting and, being eligible, offers himself for re-election. MERGE ENERGY BHD X 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 2007 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 ANNUAL REPORT 2007 Direct interests: Maseri Bin Basirah 10,000, ,000,000 Dr Mohd Soib Bin Mustakim 8,000, ,000,000 Indirect interests: Dato Muhammad Azaham Bin Abdul Wahab 13,000, ,000,000 Yusof Badawi 13,000, ,000,000 By virtue of Section 6A of the Companies Act, 1965, Dato Muhammad Azaham Bin Abdul Wahab and Yusof Badawi are deemed to have an interest in the shares of the subsidiary companies to the extend of the Company having an interest. Other than as disclosed above, none of the other Directors who held office at the end of the financial year held any interest in the shares of the Company and its related corporations.

30 28 directors' report 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 other than remuneration received by certain Director as director of the subsidiary company. ANNUAL REPORT 2007 MERGE ENERGY BHD X 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) (b) 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. 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. (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) (iii) 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 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) 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

31 directors' report 29 (II) FROM THE END OF THE FINANCIAL YEAR TO THE DATE OF THIS REPORT (continued) (d) In the opinion of the Directors: (continued) (ii) 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. MERGE ENERGY BHD X 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. ANNUAL REPORT 2007 Dato Muhammad Azaham Bin Abdul Wahab Director Yusof Badawi Director Shah Alam 25 May 2007

32 30 STATEMENT BY DIRECTORS In the opinion of the Directors, the financial statements set out on pages 32 to 75 have been drawn up in accordance with applicable approved Financial Reporting 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 2007 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 ANNUAL REPORT 2007 MERGE ENERGY BHD X On behalf of the Board, Dato Muhammad Azaham Bin Abdul Wahab Director Shah Alam 25 May 2007 STATUTORY DECLARATION Yusof Badawi Director I, Yusof Badawi, 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 32 to 75 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 25 May 2007 ) ) Yusof Badawi Before me: A.T. VELU (W240) Pesuruhjaya Sumpah Kuala Lumpur

33 REPORT OF THE AUDITORS TO THE MEMBERS OF MERGE ENERGY BHD. 31 We have audited the financial statements set out on pages 32 to 75. These financial statements are the responsibility of the Company s Directors. It is our responsibility to form an independent opinion, based on our audit, on the financial statements and to report our opinion to you, as a body, in accordance with Section 174 of the Companies Act, 1965 and for no other purpose. We do not assume responsibility towards any other person for the content of this report. We conducted our audit in accordance with approved standards on auditing in Malaysia. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Directors, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion: (a) the financial statements have been properly drawn up in accordance with applicable approved Financial Reporting Standards in Malaysia and the provisions of the Companies Act, 1965 so as to give a true and fair view of: MERGE ENERGY BHD X (i) the matters required by Section 169 of the Companies Act, 1965 to be dealt with in the financial statements of the Group and of the Company; and and (b) (ii) the state of affairs of the Group and of the Company as at 31 January 2007 and of their results and cash flows for the financial year then ended; the accounting and other records and the registers required by the Act to be kept by the Company and its subsidiary companies have been properly kept in accordance with the provisions of the said Act. ANNUAL REPORT 2007 We are satisfied that the financial statements of the subsidiary companies that are consolidated with the Company s financial statements are in form and content appropriate and proper for the purposes of the preparation of the consolidated financial statements and we have received satisfactory information and explanations required by us for those purposes. Our reports on the financial statements of the subsidiary companies were not subject to any qualification and did not include any comment made under Section 174(3) of the said Act. Without qualifying our opinion, we draw attention to Note 5.1 to the financial statements which states that the Company is an affected issuer pursuant to Bursa Malaysia s Amended Practice Note No. 17/2005 and its Regularisation Plan is currently pending the approval of relevant authorities. Based on its Regularisation Plan, the Directors are of the opinion that the preparation of the financial statements on a going concern basis is appropriate. BDO Binder AF:0206 Chartered Accountants Tan Lye Chong 1972/08/07 (J) Partner Kuala Lumpur 25 May 2007

34 32 BALANCE SHEETS AS AT 31 JANUARY 2007 Group Company NOTE RM RM RM RM ASSETS NON-CURRENT ASSETS ANNUAL REPORT 2007 MERGE ENERGY BHD X Property, plant and equipment 6 2,728,294 2,962,574 1,584,401 1,747,608 Investment in subsidiary companies ,198,645 24,198,645 Investment in jointly controlled entity 8 2,510,656 2,513, Investment properties 9 6,635,713 9,870, CURRENT ASSETS 11,874,663 15,346,048 25,783,046 25,946,253 Amounts due from customers for contract works 10 67,363,141 13,472, Trade receivables 11 4,913,340 33,342, Other receivables, deposits and prepayments , , ,666 62,597 Amounts owing by subsidiary companies ,019, ,050 Amount owing by jointly controlled entity , , Cash and bank balances 3,419,459 1,102,611 15,037 32,530 76,482,302 48,430,998 2,558, ,177 Non-current assets classified as held for sales 15 2,471, ,953,869 48,430,998 2,558, ,177 TOTAL ASSETS 90,828,532 63,777,046 28,341,995 26,283,430 The attached notes form an integral part of the financial statements.

35 balance sheets as at 31 january Group Company NOTE RM RM RM RM EQUITY AND LIABILITIES EQUITY Share Capital 16 67,000,000 67,000,000 67,000,000 67,000,000 Reserves 17 (35,965,287) (56,476,338) (44,577,753) (43,560,369) TOTAL EQUITY 31,034,713 10,523,662 22,422,247 23,439,631 NON-CURRENT LIABILITY MERGE ENERGY BHD X Borrowings (interest bearing) 18 2,754,350 6,157,754 15, ,916 CURRENT LIABILITIES Trade payables 22 39,121,839 23,396, Other payables and accruals 23 12,615,972 12,046, , ,744 Amount owing to a subsidiary company ,974, ,139 Provisions 24-6,770, Borrowings (interest bearing) 18 3,521,503 3,113, , ,843 Tax liabilities 1,780,155 1,769, , ,157 ANNUAL REPORT ,039,469 47,095,630 5,904,196 2,372,883 TOTAL LIABILITIES 59,793,819 53,253,384 5,919,748 2,843,799 TOTAL EQUITY AND LIABILITIES 90,828,532 63,777,046 28,341,995 26,283,430 The attached notes form an integral part of the financial statements.

36 34 INCOME STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 JANUARY 2007 Group Company NOTE RM RM RM RM Revenue ,486,904 90,284, Cost of sales (177,704,084) (79,670,528) - - ANNUAL REPORT 2007 MERGE ENERGY BHD X Gross profit 22,782,820 10,614, Other income 523, , ,420 Administration expenses (2,345,786) (2,646,818) (927,576) (1,326,202) Other expenses (391,165) (1,614,185) - (4,290,721) Finance costs (748,172) (1,073,735) (89,987) (138,948) Share of loss in jointly controlled entity (2,791) (1,397) - - Profit/(Loss) before tax 26 19,817,985 5,584,335 (1,017,384) (5,731,451) Tax (expense)/income 29 (40,127) (594,540) - 91,137 Net profit/(loss) for the financial year 19,777,858 4,989,795 (1,017,384) (5,640,314) Earnings per ordinary share (sen) The attached notes form an integral part of the financial statements.

37 STATEMENTS OF CHANGES IN EQUITY FOR THE FINANCIAL YEAR ENDED 31 JANUARY Group < Attributable to Equity Holders of the Company > < Non-distributable > Share Share Revaluation Accumulated capital premium reserve losses Total RM RM RM RM RM Balance as at 31 January ,000,000 7,712, ,056 (69,315,119) 5,711,445 Impairment loss on revalued asset, recognised directly in equity - - (177,578) - (177,578) Net profit for the financial year ,989,795 4,989,795 Total recognised income and expense for the financial year - - (177,578) 4,989,795 4,812,217 MERGE ENERGY BHD X Transfer of revaluation reserve to accumulated losses upon disposal of property, plant and equipment - - (136,478) 136,478 - Balance as at 31 January ,000,000 7,712,508 - (64,188,846) 10,523,662 Effect of adopting FRS 140 (Note 9) , ,193 ANNUAL REPORT 2007 Balance as at 1 February ,000,000 7,712,508 - (63,455,653) 11,256,855 Net profit for the financial year, representing total recognised income and expense for the financial year ,777,858 19,777,858 Balance as at 31 January ,000,000 7,712,508 - (43,677,795) 31,034,713 The attached notes form an integral part of the financial statements.

38 36 statements of changes in equity for the financial year ended 31 january 2007 Company < Attributable to Equity Holders of the Company > < Non-distributable > Share Share Revaluation Accumulated capital premium reserve losses Total RM RM RM RM RM ANNUAL REPORT 2007 MERGE ENERGY BHD X Balance as at 31 January ,000,000 7,712,508 - (45,632,563) 29,079,945 Net loss for the financial year, representing total recognised income and expense for the financial year (5,640,314) (5,640,314) Balance as at 31 January ,000,000 7,712,508 - (51,272,877) 23,439,631 Net loss for the financial year, representing total recognised income and expense for the financial year (1,017,384) (1,017,384) Balance as at 31 January ,000,000 7,712,508 - (52,290,261) 22,422,247 The attached notes form an integral part of the financial statements.

39 CASH FLOW STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 JANUARY CASH FLOWS FROM OPERATING ACTIVITIES Group Company RM RM RM RM Profit/(Loss) before tax 19,817,985 5,584,335 (1,017,384) (5,731,451) Adjustments for: Allowance for doubtful debts 199, ,665-4,190,833 Allowance for doubtful debts no longer required (24,420) Bad debts written off - 83, Deposits written off 145,520 49, Depreciation 242, , , ,045 Gain on fair value adjustment of investment properties (200,000) Loss on disposal of investment properties 39, (Gain)/Loss on disposal of property, plant and equipment (319) 157,572 (179) - Impairment loss on property, plant and equipment - 43, Interest expense 747,796 1,073,659 89, ,948 Interest income (18,401) (15,868) - - Share of results in jointly controlled entity 2,791 1, Operating profit/(loss) before working capital changes 20,977,778 8,049,111 (764,370) (1,262,045) MERGE ENERGY BHD X ANNUAL REPORT 2007 Increase in amounts due from customers for contract works (53,890,804) (11,555,352) - - Decrease/(Increase) in trade receivables 21,499,540 (18,044,398) - - (Increase)/Decrease in other receivables, deposits and prepayments (458,368) 105,336 (462,069) 2,245 Increase in trade payables 16,381,106 15,528, Increase/(Decrease) in other payables and accruals 566,414 9,345,729 (69,925) 34,841 Cash generated from/(used in) operations 5,075,666 3,428,482 (1,296,364) (1,224,959) Interest paid (557,732) (824,099) - - Tax paid (28,971) (156,503) - (4,102) Net cash from/(used in) operating activities 4,488,963 2,447,880 (1,296,364) (1,229,061) The attached notes form an integral part of the financial statements.

40 38 cash flow statements for the financial year ended 31 january 2007 CASH FLOWS FROM INVESTING ACTIVITIES Group Company RM RM RM RM ANNUAL REPORT 2007 MERGE ENERGY BHD X Interest received 18,401 15, Proceeds from disposal of investment properties 1,000, Proceeds from disposal of property, plant and equipment 3,030 1,000, Purchase of property, plant and equipment (Note 32) (8,410) (1,280) - - Net cash from investing activities 1,013,021 1,014, CASH FLOWS FROM FINANCING ACTIVITIES Interest paid (190,064) (249,560) (89,987) (138,948) Advance from a subsidiary company - - 3,795, ,139 (Advances to)/repayments from subsidiary companies - - (1,765,365) 1,832,418 Repayments of hire-purchase creditors (68,271) (69,370) (46,676) (31,117) Repayments of term loans (861,251) (903,833) (615,042) (609,628) Net cash (used in)/from financing activities (1,119,586) (1,222,763) 1,278,691 1,219,864 NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 4,382,398 2,239,705 (17,493) (9,197) CASH AND CASH EQUIVALENTS AT BEGINNING OF FINANCIAL YEAR (5,563,226) (7,802,931) 32,530 41,727 CASH AND CASH EQUIVALENTS AT END OF FINANCIAL YEAR (NOTE 33) (1,180,828) (5,563,226) 15,037 32,530 The attached notes form an integral part of the financial statements.

41 NOTES TO THE FINANCIAL STATEMENTS 31 JANUARY GENERAL INFORMATION The Company is a public limited liability company, incorporated and domiciled in Malaysia. The registered office and principal place of business of the Company are located at No. 2, Jalan Apollo U5/190, Bandar Pinggiran Subang, Seksyen U5, Shah Alam, Selangor Darul Ehsan. The financial statements are presented in Ringgit Malaysia. 2. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES The Group s overall financial risk management objective is to optimise value creation for shareholders as well as ensuring that adequate financial resources are available for the development of the Group s business whilst managing its risks. The Group s policy is not to engage in speculative transactions. The Group operates within an established risk management framework and clearly defined guidelines that are regularly reviewed by the Board of Directors and does not trade in derivative financial instruments. Financial risk management is carried out through internal control systems and adherence to Group financial risk management policies. MERGE ENERGY BHD X The major areas of financial risks faced by the Group and the financial risk management policies in respect of the major areas are set out as follows: Interest rate risk The Group s primary interest rate risk relates to interest bearing assets and debts. The investment in financial assets are not held for speculative purpose but have been mostly placed in call which yield better returns than cash at bank. The Group manages its interest rate exposure on its debts by maintaining a mixture of fixed and floating rate borrowings. Credit risk ANNUAL REPORT 2007 The credit risk attributable to receivables is managed and monitored on an ongoing basis via Group Management reporting procedures and internal credit review procedures. Liquidity and cash flow risk The Group manages its debt maturity profile, operating cash flows and the availability of funding so as to ensure that all operating, investing and financing needs are met. As part of its overall prudent liquidity management, the Group strives to maintain sufficient levels of cash or cash convertible investments to meet its working capital commitments. In addition, the Group strives to maintain available banking facilities at a reasonable level to meet its business needs. 3. 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.

42 40 notes to the financial statements 31 january BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS The financial statements of the Group and of the Company have been prepared in accordance with applicable approved Financial Reporting Standards ( FRS ) in Malaysia and the provisions of the Companies Act, SIGNIFICANT ACCOUNTING POLICIES ANNUAL REPORT 2007 MERGE ENERGY BHD X 5.1 Basis of accounting The financial statements of the Group and of the Company have been prepared under the historical cost convention (as modified by the revaluation of certain land and buildings) unless otherwise indicated in the significant accounting policies and on the basis of accounting principles applicable to a going concern. As announced by the Company on 8 May 2006, the Company is an affected issuer pursuant to Bursa Malaysia s Amended Practice Note No.17/2005 and it is required to announce the status of its plan to regularise the Group s financial conditions ( the Regularisation Plan ). As at the date of this report, the Company has submitted its Regularisation Plan, which is still pending the approval of the relevant authorities. On 25 September 2006, as part of the Regularisation Plan, the Company has entered into a sale and purchase agreement ( SPA ) to acquire the entire equity interest in Suasa Efektif (M) Sdn. Bhd. ( SESB ), a company incorporated in Malaysia, and the RM8,462,000 7 year 10% redeemable convertible unsecured loan stocks 2003/2010 in SESB for total purchase consideration of RM46,900,000, to be satisfied by the issuance of 46,900,000 ordinary shares of RM1.00 each in the Company at an issue price of RM1 per share. The proposed acquisition of SESB will enhance the earnings of the Group. In addition to the proposed acquisition of SESB, the Directors are also evaluating various options to enhance the Regularisation Plan, and have attended to all queries from the relevant authorities to the date of this report. Therefore, based on the foregoing, the Directors are of the opinion that the preparation of financial statements of the Group and of the Company on a going concern basis is appropriate. In the event that the going concern basis of preparing the financial statements of the Group and of the Company be inappropriate, adjustments will have to be made to reclassify non-current assets and non-current liabilities to current assets and current liabilities respectively, to restate the carrying value of assets to their recoverable amounts and to provide for further liabilities which may arise. The preparation of financial statements in conformity with applicable approved FRS in Malaysia and the provisions of the Companies Act, 1965 requires the Directors to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 5.2 Changes in accounting policies The accounting policies have been consistently applied by the Group and the Company and are consistent with those used in the previous financial year, except for the changes in accounting policies discussed below.

43 notes to the financial statements 31 january SIGNIFICANT ACCOUNTING POLICIES (continued) 5.2 Changes in accounting policies (continued) Adoption of new/revised standards On 1 February 2006, the Group and the Company adopted the following new/revised FRS which are relevant to the Group and the Company and mandatory for annual financial periods beginning on or after 1 January All new/revised standards adopted by the Group and the Company require retrospective application unless otherwise stated. (i) FRS 5: Non-current assets held for sale and discontinued operations Prior to 1 February 2006, non-current assets (or disposal groups) held for sale were neither classified nor presented as current assets or liabilities. There were no differences in the measurement of non-current assets (or disposal groups) held for sale and those for continuing use. Upon the adoption of FRS 5, non-current assets (or disposal groups) held for sale are classified as current assets (and current liabilities, in the case of non-current liabilities included within disposal groups) and are stated at the lower of carrying amount and fair value less costs to sell. MERGE ENERGY BHD X (ii) FRS 140: Investment property The Group has reclassified certain properties which are held to earn rentals or for capital appreciation previously accounted for as property, plant and equipment using the cost method as allowed by International Accounting Standard 25: Accounting for Investment, to investment properties. As a result of adopting FRS 140, investment properties are measured at fair value. Gains or losses arising from changes in the fair values of investment properties are recognised in the income statement in the period in which they arise. In accordance with the transitional provisions of FRS 140, the relevant opening balances have been adjusted to reflect the fair value of the investment properties as at 1 February As permitted by the transitional provisions, the comparative as at 31 January 2006 is not restated. ANNUAL REPORT 2007 The change in accounting policy has the following impact on the financial statements: Balance sheet as at 31 January 2007 RM Increase in investment properties as at 1 February ,193 Decrease in accumulated losses as at 1 February ,193 (iii) Other new/ revised standards adopted In addition, the Group adopted the following FRS which did not result in any significant change in accounting policies: FRS 3 FRS 101 FRS 108 FRS 110 Business Combinations Presentation of Financial Statements Accounting Policies, Changes in Accounting Estimates and Errors Events after the Balance Sheet Date

44 42 notes to the financial statements 31 january SIGNIFICANT ACCOUNTING POLICIES (continued) 5.2 Changes in accounting policies (continued) Adoption of new/revised standards (continued) (iii) Other new/ revised standards adopted (continued) ANNUAL REPORT 2007 MERGE ENERGY BHD X FRS 116 FRS 127 FRS 131 FRS 132 FRS 133 FRS 136 FRS 138 Property, Plant and Equipment Consolidated and Separate Financial Statements Interest in Joint Ventures Financial Instruments: Disclosure and Presentation Earnings per Share Impairment of Assets Intangible Assets The adoption of the above standards does not have any significant financial impact to the Group FRS issued but not yet effective The Group and the Company have not applied the following FRS which are relevant to the Group and the Company and have been issued but are yet to be effective for annual financial periods beginning on or after 1 January 2006: (i) (ii) FRS 117 Leases and FRS 124 Related party disclosures (effective for annual periods beginning on or after 1 October 2006); and FRS 139: Financial instruments: recognition and measurement (effective date yet to be determined by the MASB). By virtue of the exemption in these standards, the impact on its financial statements upon first adoption of these standards as required by Paragraph 30(b) of FRS 108 Accounting Policies, Changes in Accounting Estimates and Errors are not disclosed. 5.3 Significant accounting estimates and judgements Estimates, assumptions concerning the future and judgements are made in the preparation of the financial statements. They affect the application of the Group s and the Company s accounting policies, reported amount of assets, liabilities, income and expenses, and disclosures made. They are assessed on an on-going basis and are based on experience and relevant factors, including expectations of future events that are believed to be reasonable under the circumstances Key sources of estimation uncertainty The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

45 notes to the financial statements 31 january SIGNIFICANT ACCOUNTING POLICIES (continued) 5.3 Significant accounting estimates and judgements (continued) Key sources of estimation uncertainty (continued) (i) Depreciation of property, plant and equipment (ii) The depreciable costs of assets are allocated on a straight-line basis over their estimated useful lives as disclosed in Note 5.5 to the financial statements. Changes in the expected level of usage and technological developments could impact the economic useful lives and the residual values of these assets. Valuation of investment properties In the absence of valuation by independent valuer, the fair value of investment properties is determined by the directors based on their assessment of available market prices of similar properties in the vicinity, outlook of the property market within the location, designation of use and acceptable level of variance in professional judgement. MERGE ENERGY BHD X (iii) Going concern The financial statements of the Group and of the Company are prepared on the going concern basis. The going concern basis has been made on the assumption that the Company s Regularisation Plan will be approved by relevant authorities. 5.4 Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and all its subsidiary companies made up to the end of the financial year using acquisition method of accounting. ANNUAL REPORT 2007 Inter-company transactions and balances are eliminated on consolidation and the consolidated financial statements reflect external transactions only. Prior to the adoption of FRS 3, the Company has adopted both the acquisition and merger method of consolidation which was allowed under MASB 21 Business Combination. Under the merger method, where the cost of investment is greater than the nominal value of the shares acquired, the difference is set off against retained profits. The results of subsidiary companies consolidated under this method are accounted for as if the companies had been merged throughout the current and previous financial years. Where the acquisition method is adopted, the results of the subsidiary companies acquired are included in the consolidated financial statements from the date of acquisition and up to the date of disposal. The difference between the aggregate cost of investment in the subsidiary companies and their underlying fair value of net assets at the date of acquisition is treated as goodwill or negative goodwill as appropriate.

46 44 notes to the financial statements 31 january SIGNIFICANT ACCOUNTING POLICIES (continued) 5.4 Basis of consolidation (continued) ANNUAL REPORT 2007 MERGE ENERGY BHD X Goodwill on consolidation is stated at cost less impairment losses, if any, and the carrying amount is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired. Under FRS 3, negative goodwill arising on consolidation or any excess of the Group s interest in the net fair value of an acquiree s identifiable assets, liabilities and contingent liabilities over the cost of business combinations, after reassessment, is recognised immediately in the income statement. Prior to 1 February 2006, negative goodwill was not amortised and was presented as a separate item in equity. However, the change in accounting policy has no impact on the Group s financial statements. 5.5 Property, plant and equipment and depreciation Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Upon disposal of an item of property, plant and equipment, the difference between the net disposal proceeds and the net carrying amount is recognised in the income statement and the revaluation reserve related to those assets, if any, is transferred directly to retained profits. Leasehold land held in excess of fifty (50) years is considered as long term lease. The long term leasehold land is amortised over the terms of the respective lease period ranging from 94 to 99 years. Depreciation on other property, plant and equipment is calculated on a straight line basis to write off the costs of the assets to their residual values over their estimated useful lives. The principal annual depreciation rates are as follows: Buildings 2% Plant and machinery 10% to 20% Motor vehicles 10% to 20% Furniture, fittings and office equipment 5% to 33% Office renovation 5% The residual values, useful life and depreciation method are reviewed at each balance sheet date to ensure that the residual values, period of depreciation and depreciation method are consistent with previous estimates and the expected pattern of consumption of future economic benefits embodied in the items of property, plant and equipment. An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset is included in the income statement in the year the asset is derecognised. 5.6 Investments (i) Subsidiary companies Subsidiary companies are those companies in which the Group has long term equity interest and where it has power to govern the financial and operating policies so as to obtain benefits from their activities.

47 notes to the financial statements 31 january SIGNIFICANT ACCOUNTING POLICIES (continued) 5.6 Investments (continued) (i) Subsidiary companies (continued) Investments in subsidiary companies are stated at cost less impairment losses in the Company s separate financial statements. (ii) Jointly controlled entity Interest in joint venture is a jointly controlled entity over which there is contractually agreed sharing of control where two or more parties must consent to all major strategic decisions. Interest in jointly controlled entity is stated at cost less impairment losses, if any. The Group s interest in jointly controlled entity is accounted for in the consolidated financial statements using the equity method of accounting where the Group s share of the post acquisition reserves and results of the jointly controlled entity is included in the consolidated financial statements. MERGE ENERGY BHD X 5.7 Investment properties The investment properties consist of land and buildings that are not substantially occupied for use by, or in the operations of the Group and are held to earn rental income or for capital appreciation or both. Investment property is measured initially at cost, including related transaction cost. After initial recognition, investment property is carried at fair value. Fair value of investment property is determined by registered independent valuers who hold recognised professional qualification and have recent experience in the location and category of the investment property being valued. The fair value is arrived at based on current price in an active market for similar property in the same location and condition. In the absence of this information, fair value is alternatively determined based on recent prices of similar property on less active market, with adjustment to reflect any changes in economic conditions. ANNUAL REPORT 2007 A property interest under an operating lease is classified and accounted for as an investment property on a property-by-property basis when the Group holds it to earn rentals or for capital appreciation or both. Any such property interest under an operating lease classified as an investment property is initially measured at the lower of the fair value of the property and the present value of the minimum lease payments. Subsequently, such property interest under an operating lease classified as an investment property is carried at fair value. Any gain or loss arising from a change in the fair value of investment property is recognised in the income statement.

48 46 notes to the financial statements 31 january SIGNIFICANT ACCOUNTING POLICIES (continued) 5.7 Investment properties (continued) Investment properties are derecognised when either they have been disposed of or when the investment property is permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gains or losses on the retirement or disposal of an investment property are recognised in the income statement in the year in which they arise. ANNUAL REPORT 2007 MERGE ENERGY BHD X 5.8 Impairment of assets The carrying amounts of the Group s and Company s assets, other than financial assets (except for investment in subsidiary companies and interest in jointly controlled entity) and amounts due from customers for contract works, are reviewed at each balance sheet date to determine whether there is any indication of impairment in value or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If any such indication exists, or when annual impairment testing for an asset is required, the asset s recoverable amount is estimated and an impairment loss is recognised whenever the recoverable amount is less than the carrying amount of the asset. Where it is not possible to estimate the recoverable amount of an individual asset, the Group and the Company estimate the recoverable amount of the cash-generating unit ( CGU ) to which the asset belongs. Recoverable amount is the higher of fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped (as CGU) at the lowest levels for which there are separately identifiable cash flows. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessment of the time value of money and the risks specific to the asset. The impairment loss and all reversals of impairment loss are recognised in the income statement immediately. When an impairment loss is subsequently reversed, the carrying amount of the asset or CGU is increased to the revised estimated recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset or CGU in prior years. A reversal of an impairment loss is recognised in the income statement immediately. 5.9 Amounts due from/to customers for contract works When contract costs incurred plus attributable profits or less foreseeable losses, if any, exceed progress billings, the balance is shown as amounts due from customers for contract works. When progress billings exceed costs incurred plus attributable profits or less foreseeable losses, if any, the balance is shown as amounts due to customers for contract works Receivables Receivables are carried at anticipated realisable value. Known bad debts are written off and specific allowance is made for debts considered to be doubtful of collection.

49 notes to the financial statements 31 january SIGNIFICANT ACCOUNTING POLICIES (continued) 5.11 Non-current assets (or disposal groups) held for sale Non-current assets (or disposal groups) are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its present condition subject only to terms that are usual and customary. Immediately before classification of non-current assets (or disposal groups) as held for sale, the measurement of the non-current assets (or all the assets and liabilities in a disposal group) is brought up-to-date in accordance with applicable FRS. Then on initial classification as held for sale, non-current assets or disposal groups (other than investment properties, deferred tax assets, and financial assets) are measured at the lower of carrying amount and fair value less costs to sell. Any differences are included in the income statement Payables MERGE ENERGY BHD X Payables are stated at cost which is the fair value of the consideration to be paid in the future for goods and services received Provisions Provisions are recognised when there is a present obligation, legal or constructive, as a result of a past event, when it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation Assets acquired under hire-purchase agreements ANNUAL REPORT 2007 Assets acquired under hire-purchase arrangements which transfer substantially all the risks and rewards of ownership to the Group and the Company are capitalised as property, plant and equipment and the corresponding obligations are treated as liabilities. The property, plant and equipment capitalised are depreciated on the same basis as owned assets. Finance charges are allocated to the income statement over the period of the agreements to give a constant periodic rate of charge on the remaining hire-purchase liabilities Revenue recognition (i) Construction contracts Revenue from construction contracts is recognised in the income statement based on stage of completion. The stage of completion of a construction contract is determined based on the proportion that contract costs incurred for work performed to date bear to the estimated total cost of services to be performed.

50 48 notes to the financial statements 31 january SIGNIFICANT ACCOUNTING POLICIES (continued) 5.15 Revenue recognition (continued) (i) Construction contracts (continued) ANNUAL REPORT 2007 MERGE ENERGY BHD X (ii) (iii) When the outcome of a construction contract can be estimated reliably, contract revenue and contract costs associated with the construction contract are recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the balance sheet date. When the outcome of a construction contract cannot be estimated reliably, contract revenue are recognised only to the extent of contract costs incurred that it is probable to be recoverable and contract costs are recognised as expenses in the period in which they are incurred. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately. Rental income Revenue from rental income is recognised in the income statement on accrual basis unless collectibility is in doubt. Dividend income 5.16 Employee benefits (i) Dividends are recognised when the shareholders right to receive payment is established. Short term employee benefits Wages, salaries, social security contributions, paid annual leave, paid sick leave and nonmonetary benefits are recognised as an expense in the financial year when employees have rendered their services to the Group. Short term accumulating compensated absences such as paid annual leave are recognised as an expense when services are rendered by employees that increase their entitlement to future compensated absences. Short term non-accumulating compensated absences such as sick leave are recognised when the absences occur. Bonuses are recognised as an expense when there is a present, legal or constructive obligation to make such payments, as a result of past events and when a reliable estimate can be made of the amount of the obligation. (ii) Defined contribution plans The Company and its subsidiary companies make contributions to a statutory provident fund. These contributions are recognised as an expense in the financial year in which the employees render their services.

51 notes to the financial statements 31 january SIGNIFICANT ACCOUNTING POLICIES (continued) 5.17 Income tax Income tax in the financial statements for the financial year comprises current tax expense and deferred tax. (i) (ii) Current tax expense Current tax expense includes all domestic taxes which are based on taxable profits. Deferred tax Deferred tax, which includes deferred tax liabilities and assets, is provided for under the liability method in respect of all temporary differences between the carrying amount of an asset or liability in the balance sheet and its tax base including unused tax losses and capital allowances. Deferred tax is measured at the tax rates that are expected to apply in the period when the asset is realised or the liability is settled, based on tax rates that have been enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profit will be available against which the deductible temporary differences can be utilised. The carrying amount of a deferred tax asset is reviewed at each balance sheet date. If it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilised, the carrying amount of the deferred tax asset will be reduced accordingly. When it becomes probable that sufficient taxable profit will be available, such reductions will be reversed to the extent of the taxable profit. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set-off current tax assets against current tax liabilities and when the deferred tax assets and deferred tax liabilities relate to the same taxation authority. MERGE ENERGY BHD X ANNUAL REPORT Cash and cash equivalents Cash and cash equivalents include cash and bank balances, bank overdrafts, deposits and other short term, highly liquid investments which are readily convertible to cash and which are subject to insignificant risk of changes in value Segment information The reporting segment information is in respect of business segments as the Group s risks and rates of return are affected predominantly by differences in the services it provides. No segment information on the basis of geographical segments is presented as the Group operates predominantly in Malaysia. Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Segment capital expenditure is the total cost incurred during the period to acquire segment assets that is expected to be used for more than one period.

52 50 notes to the financial statements 31 january SIGNIFICANT ACCOUNTING POLICIES (continued) 5.20 Financial instruments recognised on the balance sheets (i) Ordinary shares ANNUAL REPORT 2007 MERGE ENERGY BHD X (ii) (iii) Ordinary shares are recorded at the nominal value and proceeds in excess of the nominal value of shares issued, if any, are accounted for as share premium. Both ordinary shares and share premium are classified as equity. Cost incurred directly attributable to the issuance of shares are accounted for as a deduction from share premium. Otherwise, they are charged to the income statement. Dividends to shareholders are recognised in equity in the period in which they are declared. Borrowings Interest bearing borrowings are initially recorded at the gross amount of proceeds received. Other financial instruments The accounting policies for other financial instruments recognised on the balance sheets are disclosed in the individual policies associated with each item.

53 notes to the financial statements 31 january PROPERTY, PLANT AND EQUIPMENT Group Balance Balance as at as at 1 February 31 January Additions Disposals 2007 RM RM RM RM Cost unless otherwise stated Long term leasehold land and buildings 1,634, ,634,703 Plant and machinery 26, ,001 Motor vehicles 614,703 8,410 (11,068) 612,045 Furniture, fittings and office equipment 855,608 - (1,500) 854,108 Office renovation 1,578,027 2,800-1,580,827 4,709,042 11,210 (12,568) 4,707,684 MERGE ENERGY BHD X Accumulated depreciation Balance Balance as at Charge for as at 1 February the financial 31 January 2006 year Disposals 2007 RM RM RM RM Long term leasehold land and buildings 154,675 17, ,703 Plant and machinery 23,401 2,599-26,000 Motor vehicles 337,442 99,811 (8,358) 428,895 Furniture, fittings and office equipment 738,329 44,440 (1,499) 781,270 Office renovation 492,621 78, ,522 ANNUAL REPORT ,746, ,779 (9,857) 1,979,390

54 52 notes to the financial statements 31 january PROPERTY, PLANT AND EQUIPMENT (continued) ANNUAL REPORT 2007 MERGE ENERGY BHD X Group Balance Balance as at as at 1 February 31 January Additions Disposals 2006 RM RM RM RM Cost unless otherwise stated Freehold land and buildings - at valuation 1,610,000 - (1,610,000) - Long term leasehold land and buildings 1,634, ,634,703 Plant and machinery 26, ,001 Motor vehicles 419, , ,703 Furniture, fittings and office equipment 854,328 1, ,608 Office renovation 1,578, ,578,027 6,122, ,280 (1,610,000) 4,709,042 Balance Balance as at Charge for as at 1 February the financial 31 January year Disposals 2006 RM RM RM RM Accumulated depreciation Freehold land and buildings - at valuation 125,948 10,480 (136,428) - Long term leasehold land and buildings 137,647 17, ,675 Plant and machinery 19,501 3,900-23,401 Motor vehicles 237,547 99, ,442 Furniture, fittings and office equipment 687,620 50, ,329 Office renovation 413,721 78, ,621 1,621, ,912 (136,428) 1,746,468

55 notes to the financial statements 31 january PROPERTY, PLANT AND EQUIPMENT (continued) Group Balance Balance as at as at 1 February 31 January 2005 Disposal 2006 RM RM RM Accumulated impairment losses Freehold land and building 316,000 (316,000) - Net book value RM RM Freehold land and buildings - at valuation - - Long term leasehold land and buildings 1,463,000 1,480,028 Plant and machinery 1 2,600 Motor vehicles 183, ,261 Furniture, fittings and office equipment 72, ,279 Office renovation 1,009,305 1,085,406 2,728,294 2,962,574 Company Balance Balance as at as at 1 February 31 January Disposal 2007 RM RM RM Cost MERGE ENERGY BHD X ANNUAL REPORT 2007 Furniture, fittings and office equipment 138,420 (1,500) 136,920 Office renovation 2,244,456-2,244,456 Motor vehicle 195, ,000 2,577,876 (1,500) 2,576,376

56 54 notes to the financial statements 31 january PROPERTY, PLANT AND EQUIPMENT (continued) ANNUAL REPORT 2007 MERGE ENERGY BHD X Company Balance Balance as at Charge for as at 1 February the financial 31 January year Disposal 2007 RM RM RM RM Accumulated depreciation Furniture, fittings and office equipment 93,841 11,983 (1,499) 104,325 Office renovation 697, , ,650 Motor vehicle 39,000 39,000-78, , ,206 (1,499) 991,975 Balance Balance as at as at 1 February 31 January Addition 2006 RM RM RM Cost Furniture, fittings and office equipment 138, ,420 Office renovation 2,244,456-2,244,456 Motor vehicle - 195, ,000 2,382, ,000 2,577,876 Accumulated depreciation Balance Balance as at Charge for as at 1 February the financial 31 January 2005 year 2006 RM RM RM Furniture, fittings and office equipment 81,019 12,822 93,841 Office renovation 585, , ,427 Motor vehicle - 39,000 39, , , ,268

57 notes to the financial statements 31 january PROPERTY, PLANT AND EQUIPMENT (continued) Company RM RM Net book value Furniture, fittings and office equipment 32,595 44,579 Office renovation 1,434,806 1,547,029 Motor vehicle 117, ,000 (a) (b) 1,584,401 1,747,608 Included in the net book value of property, plant and equipment of the Group are motor vehicles with net book value of RM173,734 (2006: RM242,334) acquired under hire-purchase arrangements. Long term leasehold land and buildings of a subsidiary company have been charged to financial institutions for banking facilities granted to the Group (Note 19 and 21). MERGE ENERGY BHD X 7. INVESTMENT IN SUBSIDIARY COMPANIES Company RM RM Unquoted shares, at cost 58,274,485 58,274,485 Less: Impairment losses (34,075,840) (34,075,840) ANNUAL REPORT 2007 The subsidiary companies, all of which are incorporated in Malaysia, are as follows: 24,198,645 24,198,645 Interest in equity held by Name of Company the Company Principal activities Mewah Kota Sdn. Bhd. 100% 100% Contractor for various kinds of building, structural and engineering works Merge Properties Management 100% 100% Inactive Services Sdn. Bhd. Merge Properties Sdn. Bhd. 100% 100% Property investment

58 56 notes to the financial statements 31 january INVESTMENT IN SUBSIDIARY COMPANIES (continued) Interest in equity held by Name of Company the Company Principal activities ANNUAL REPORT 2007 MERGE ENERGY BHD X MEB Development Sdn. Bhd. 100% 100% Inactive MEB Management Sdn. Bhd. 100% 100% Inactive Merge Environmental Engineering 100% 100% Inactive Sdn. Bhd. MEB Realty Sdn. Bhd. 100% 100% Property investment Paramount Ventures Sdn. Bhd. 100% 100% Building and general construction Merge Readymix Sdn. Bhd. 100% 100% Inactive Merge Concrete Technologies 100% 100% Inactive Sdn. Bhd. Merge Trading Sdn. Bhd. 100% 100% Inactive Merge Highway Engineering 100% 100% Inactive Sdn. Bhd. 8. INVESTMENT IN JOINTLY CONTROLLED ENTITY Group RM RM Cost of investment 2,530,489 2,530,489 Share of results (19,833) (17,042) 2,510,656 2,513,447

59 notes to the financial statements 31 january INVESTMENT IN JOINTLY CONTROLLED ENTITY (continued) The Group s share of net assets of the jointly controlled entity is as follows: Group RM RM Development expenditure 1,735,007 1,701,398 Current assets 819, ,111 Current liabilities (43,846) (63,062) Share of net assets of jointly controlled entity 2,510,656 2,513,447 The details of the jointly controlled entity are as follows: Interest in jointly controlled Name of jointly controlled entity entity Principal activity MERGE ENERGY BHD X IJMP-MK JV 30% 30% Property development 9. INVESTMENT PROPERTIES Group RM RM ANNUAL REPORT 2007 Balance as at 1 February 2006 / ,870,027 8,045,348 Effect of adopting FRS ,193 - Balance as at 1 February 2006 / 2005, restated for the effect of adopting FRS ,603,320 8,045,348 Depreciation charged during the financial year* - (54,232) Impairment loss for the financial year* - (221,089) Reclassified from leasehold properties held under property, plant and equipment - 2,100,000 Reclassified as non current assets held for sale (Note 15) (2,471,567) - Disposed during the financial year (1,695,940) - Gain on fair value adjustment (Note 26) 200,000-6,635,713 9,870,027 * The depreciation and impairment losses were provided during the financial year ended 31 January 2006 when the investment properties were classified as property, plant and equipment in that period.

60 58 notes to the financial statements 31 january INVESTMENT PROPERTIES (continued) The investment properties of certain subsidiary companies which have been charged to financial institutions for banking facilities granted to the Group (Note 19 and 21) are as follows: ANNUAL REPORT 2007 MERGE ENERGY BHD X Group RM RM At carrying amount: Freehold land and buildings 535,713 2,814,947 Leasehold land and buildings 2,850,000 2,010, AMOUNTS DUE FROM CUSTOMERS FOR CONTRACT WORKS 3,385,713 4,825,536 Group RM RM Contract costs incurred to date 267,771, ,896,882 Add: Attributable profit 35,440,163 12,303, ,211, ,200,691 Less: Progress billings (235,848,826) (109,728,354) Amounts due from customers for contract works 67,363,141 13,472, TRADE RECEIVABLES Group RM RM Trade receivables 5,856,370 39,295,592 Less: Allowance for doubtful debts, net of bad debts written off of RM5,169,681 (2006: Nil) (943,030) (5,953,437) 4,913,340 33,342,155 Included in trade receivables of the Group is retention sum for contract works of RM3,046,319 (2006: RM1,351,454). The credit terms offered by the Group in respect of trade receivables range from 30 to 120 days (2006: 30 to 120 days) from date of invoice.

61 notes to the financial statements 31 january OTHER RECEIVABLES, DEPOSITS AND PREPAYMENTS Group Company RM RM RM RM Other receivables 717, ,707 2,010 38,162 Less: Allowance for doubtful debts, net of bad debts written off of RM20,045 (2006: Nil) (686,676) (666,340) ,176 99,367 2,010 38,162 Deposits 89, ,893 11,230 10,990 Prepayments 524,107 22, ,426 13, , , ,666 62,597 MERGE ENERGY BHD X Included in prepayments are professional fees incurred for a proposed acquisition under the Regularisation Plan which is currently pending approval from the relevant authorities. 13. AMOUNTS OWING BY/(TO) SUBSIDIARY COMPANIES Company RM RM Amounts owing by subsidiary companies 18,910,904 17,133,708 Less: Allowance for doubtful debts (16,891,658) (16,891,658) ANNUAL REPORT ,019, ,050 The amounts owing by/(to) subsidiary companies represent advances and payments on behalf which are unsecured, interest-free and repayable on demand. 14. AMOUNT OWING BY JOINTLY CONTROLLED ENTITY The amount owing by jointly controlled entity represents payments made on behalf which is unsecured, interest-free and repayable on demand.

62 60 notes to the financial statements 31 january NON-CURRENT ASSETS HELD FOR SALE Group RM RM Balance as at 1 February 2006 / ANNUAL REPORT 2007 MERGE ENERGY BHD X Reclassified from investment properties (Note 9) 2,471,567 - Balance as at 31 January 2,471,567 - Included in non-current assets held for sale of the Group are freehold land and buildings of a subsidiary company with carrying amount of RM2,309,874 which have been charged to a financial institution for banking facilities granted to the Group (Note 21). On 21 December 2006, the Directors approved the disposal of the investment properties with a total carrying amount of RM2,471,567 as at the balance sheet date to a third party. The sale is pending the signing of the sale and purchase agreement which is expected to be finalised within the next 12 months. 16. SHARE CAPITAL Ordinary shares of RM1.00 each : Group and Company Number of Number of shares RM shares RM Authorised 100,000, ,000, ,000, ,000,000 Issued and fully paid 67,000,000 67,000,000 67,000,000 67,000, RESERVES Non-distributable Group Company RM RM RM RM Share premium 7,712,508 7,712,508 7,712,508 7,712,508 Accumulated losses (43,677,795) (64,188,846) (52,290,261) (51,272,877) (35,965,287) (56,476,338) (44,577,753) (43,560,369)

63 notes to the financial statements 31 january BORROWINGS (INTEREST BEARING) Group Company RM RM RM RM Current liabilities Bank overdraft - secured (Note 19) 2,786,287 2,101, Hire-purchase creditors (Note 20) 66,557 66,573 46,655 46,664 Term loans - secured (Note 21) 668, , , ,179 3,521,503 3,113, , ,843 Non-current liabilities Bank overdraft - secured (Note 19) 1,814,000 4,564, Hire-purchase creditors (Note 20) 81, ,148 15,552 62,219 Term loans - secured (Note 21) 858,458 1,443, ,697 2,754,350 6,157,754 15, ,916 Total borrowings Bank overdraft - secured 4,600,287 6,665, Hire-purchase creditors 148, ,721 62, ,883 Term loans - secured 1,527,117 2,388, ,833 1,228,876 MERGE ENERGY BHD X ANNUAL REPORT ,275,853 9,270, ,040 1,337, BANK OVERDRAFT - SECURED The bank overdraft of the Group is secured by: (a) (b) (c) (d) first fixed charge over investment properties of a subsidiary company at carrying amount of RM1,900,000 (2006: RM1,111,116) (Note 9); deed of assignments by way of equitable assignment of proceeds from contracts of a subsidiary company; debenture covering fixed and floating, present and future assets of a subsidiary company; and charge over quoted shares of a third party. The bank overdraft of the Group is jointly and severally guaranteed by certain former Directors of certain subsidiary companies.

64 62 notes to the financial statements 31 january HIRE-PURCHASE CREDITORS ANNUAL REPORT 2007 MERGE ENERGY BHD X Group Company RM RM RM RM Minimum hire-purchase payments: - not later than one year 78,480 78,468 51,576 51,564 - later than one year but not later than five years 106, ,368 17,164 68,752 - later than five years - 11, , ,908 68, ,316 Less: Future interest charges (36,737) (49,187) (6,533) (11,433) Present value of hire-purchase liabilities 148, ,721 62, ,883 Repayable as follows: Current liabilities: - not later than one year 66,557 66,573 46,655 46,664 Non-current liabilities: - later than one year but not later than five years 81, ,853 15,552 62,219 - later than five years - 8, , ,721 62, ,883

65 notes to the financial statements 31 january TERM LOANS - SECURED Repayable as follows: Group Company RM RM RM RM Current liabilities: - not later than one year 668, , , ,179 Non-current liabilities: - later than one year but not later than five years 272, , ,697 - later than five years 585, , ,458 1,443, ,697 MERGE ENERGY BHD X 1,527,117 2,388, ,833 1,228,876 The repayment terms are as follows: Group Company RM RM RM RM (a) Term loans of RM751,000 with interest at funding rate plus 1.75% per annum, repayable by 240 monthly instalments of RM6,107 each commencing February , , ANNUAL REPORT 2007 (b) Term loan of RM619,052 with interest at funding rate plus 1.75% per annum, repayable by 180 monthly instalments of RM6,208 each commencing March , , (c) Term loan of RM500,000 with interest at funding rate plus 2.00% per annum, repayable by 120 monthly instalments of RM7,230 each commencing March ,

66 64 notes to the financial statements 31 january TERM LOANS - SECURED (continued) Group Company RM RM RM RM ANNUAL REPORT 2007 MERGE ENERGY BHD X (d) Term loan of RM2,500,000 with interest at funding rate plus 2.50% per annum, repayable by 14 quarterly instalments ranging from RM100,000 to RM265,000 each commencing March ,833 1,228, ,833 1,228,876 1,527,117 2,388, ,833 1,228,876 The term loans (a) and (b) are secured by first fixed charge over the property, plant and equipment of a subsidiary company (Note 6) at net book value of RM1,463,000 (2006: RM1,480,030) and are jointly and severally guaranteed by certain former Directors of the subsidiary company. The term loan (c) is secured by a corporate guarantee from a financial corporation and is jointly and severally guaranteed by certain former Directors of the Company. During the financial year, the Group has fully settled the term loan. Term loan (d) is secured by a first fixed charge over the investment properties and non-current assets held for sale of two subsidiary companies (Notes 9 and 15) with carrying amount totalling RM3,795,587 (2006: RM3,714,420) and a charge over quoted shares of third party. 22. TRADE PAYABLES The credit terms available to the Group in respect of trade payables range from 30 to 120 days (2006: 30 to 120 days) from date of invoice. 23. OTHER PAYABLES AND ACCRUALS Group Company RM RM RM RM Other payables 1,372,913 1,395, , ,537 Accruals 11,123,509 10,517,508 93, ,957 Rental deposits received 119, ,130 11,250 11,250 12,615,972 12,046, , ,744

67 notes to the financial statements 31 january PROVISIONS Group Company RM RM RM RM Provision for liquidated and ascertained damages - 6,770, In 2006, the provision for liquidated and ascertained damages relates to charges imposed against the Group in the previous financial years arising from delay in completing two projects on the stipulated dates. This provision has been reversed against a trade receivable during the current financial year. 25. REVENUE Group Company RM RM RM RM MERGE ENERGY BHD X Contract works 200,432,804 90,252, Rental income 54,100 32, PROFIT/(LOSS) BEFORE TAX 200,486,904 90,284, Group Company RM RM RM RM ANNUAL REPORT 2007 Profit/(Loss) before tax is arrived at after charging: Allowance for doubtful debts 199, ,665-4,190,833 Auditors remuneration: - current year - statutory 49,000 41,000 20,000 17,000 - non-statutory 5,000 5,000 5,000 5,000 - under provision in prior year - statutory 8,000-3,000 - Bad debts written off - 83, Deposits written off 145,520 49, Depreciation of investment properties - 54, Depreciation of property, plant and equipment 242, , , ,045

68 66 notes to the financial statements 31 january PROFIT/(LOSS) BEFORE TAX (continued) Group Company RM RM RM RM ANNUAL REPORT 2007 MERGE ENERGY BHD X Directors remuneration: - fees (Note 28) 60,000 56,758 60,000 56,758 - other emoluments (Note 28) 292, ,417 75, ,500 Impairment loss on property, plant and equipment - 43, Interest expense on: - bank overdrafts 526, , hire-purchase 12,451 12,116 4,900 3,267 - term loans 177, ,444 85, ,681 - others 31, , Loss on disposal of investment properties 39, Loss on disposal of property, plant and equipment - 157, Rental of premises ,800 50,400 Tax penalty - 518,911-99,888 And crediting: Allowance for doubtful debts no longer required ,420 Gain on disposal of property, plant and equipment Gain on fair value adjustment of investment properties (Note 9) 200, Interest income on: - fixed deposits - 2, others 18,401 13, Rental income 358, , Contract cost of the Group recognised as an expense during the financial year amounted to RM177,665,192 (2006: RM79,639,256).

69 notes to the financial statements 31 january EMPLOYEE BENEFITS EXPENSE Total employee benefits expense recognised in the income statements are as follows: Group Company RM RM RM RM Salaries and allowances 1,144,423 1,390, , ,796 Bonus 84,520 55,280 13,500 27,822 Defined contribution plan 142, ,373 25,539 61,447 SOSCO contribution 11,257 11,236 2,109 4,436 1,382,780 1,609, , ,501 Included in employee benefits expense of the Group and of the Company are executive directors remuneration amounting to RM292,304 (2006: RM396,417) and RM75,000 (2006: RM187,500) respectively as further disclosed in Note 28. MERGE ENERGY BHD X 28. DIRECTORS REMUNERATION Group Company RM RM RM RM Directors remuneration: - non-executive directors - fees payable by the Company 60,000 56,758 60,000 56,758 ANNUAL REPORT executive directors - emoluments other than fees - payable by the Company 75, ,500 75, ,500 - payable by a subsidiary company 217, , , ,417 75, , , , , ,258

70 68 notes to the financial statements 31 january DIRECTORS REMUNERATION (continued) The number of Directors of the Company whose aggregate of remuneration received from the Company and its subsidiary company during the financial year and falling within the respective bands are as follows: ANNUAL REPORT 2007 MERGE ENERGY BHD X Executive Directors RM50,001 - RM150, RM150,001 - RM200,000-1 RM200,001 - RM250, Non-Executive Directors RM50,000 and below TAX EXPENSE/(INCOME) Group Company RM RM RM RM Current tax expense based on profit for the financial year 15,000 4, Under/(Over) provision in prior years 25, ,406 - (91,137) 40, ,540 - (91,137) The numerical reconciliation between the applicable tax rate and the average effective tax rate of the Group and of the Company are as follows: Group Company % % % % Applicable tax rate (27.0) (28.0) Tax effect in respect of: Non-allowable expenses Income not subject to tax (0.4) Utilisation of previously unrecognised tax losses and capital allowances (28.6) (42.0) Under/(Over) provision in prior years (1.6) Average effective tax rate (1.6)

71 notes to the financial statements 31 january TAX EXPENSE/ (INCOME) (continued) Tax savings of the Group are as follows: RM RM Arising from utilisation of previously unrecognised tax losses and capital allowances 5,671,000 2,345, EARNINGS PER ORDINARY SHARE The earnings per ordinary share for the financial year has been calculated based on the consolidated net profit for the financial year of RM19,777,858 (2006: RM4,989,795) and the number of ordinary shares in issue of 67,000,000 (2006: 67,000,000). MERGE ENERGY BHD X 31. DEFERRED TAX ASSETS The amount of temporary differences for which no deferred tax assets have been recognised in the balance sheet are as follows: Group RM RM Provision 332,550 - Unabsorbed capital allowances 2,089,900 3,929,700 Unutilised tax losses 66,687,000 86,310,000 ANNUAL REPORT ,109,450 90,239,700 Deferred tax assets have not been recognised in respect of these items as it is not probable that future taxable profit will be available against which the deductible temporary differences can be utilised.

72 70 notes to the financial statements 31 january PURCHASE OF PROPERTY, PLANT AND EQUIPMENT Group Company RM RM RM RM ANNUAL REPORT 2007 MERGE ENERGY BHD X Purchase of property, plant and equipment (Note 6) 11, , ,000 Financed by hire-purchase arrangement - (140,000) - (140,000) Amount owing to supplier of property, plant and equipment (2,800) (55,000) - (55,000) Cash payments on purchase of property, plant and equipment 8,410 1, CASH AND CASH EQUIVALENTS Cash and cash equivalents comprise the following balance sheet amounts: Group Company RM RM RM RM Cash and bank balances 3,419,459 1,102,611 15,037 32,530 Bank overdrafts (Note 19) (4,600,287) (6,665,837) - - (1,180,828) (5,563,226) 15,037 32, SEGMENT REPORTING The Group s operations comprise the following business segments: Investment holding : Investment holding Construction : Construction of building and structural and engineering works Property investment : Investment in properties Others : Inactive companies

73 notes to the financial statements 31 january SEGMENT REPORTING (continued) 2007 Investment Property holding Construction investment Others Elimination Consolidation RM RM RM RM RM RM Revenue External sales - 200,432,804 54, ,486,904 Inter-segment sales - 2,868, ,000 - (3,023,747) ,301, ,100 - (3,023,747) 200,486,904 Segment results (external) (837,217) 21,476,581 (47,212) (23,204) - 20,568,948 Finance cost (748,172) Share of results in jointly controlled entity - (2,791) (2,791) MERGE ENERGY BHD X Profit before tax 19,817,985 Tax expense (40,127) Net profit for the financial year 19,777,858 Other information Segment assets 1,652,205 80,217,476 6,447, ,317,876 Interest in jointly controlled entity - 2,510, ,510,656 ANNUAL REPORT 2007 Total assets 90,828,532 Segment liabilities 327,818 51,202,731 69, ,794-51,737,811 Unallocated 8,056,008 liabilities Total liabilities 59,793,819 Capital - 11, ,210 expenditure Depreciation 126,326 95,866 20, ,779 Non-cash expenses other than depreciation - 378,720 6, ,147

74 72 notes to the financial statements 31 january SEGMENT REPORTING (continued) ANNUAL REPORT 2007 MERGE ENERGY BHD X 2006 Investment Property holding Construction investment Others Elimination Consolidation RM RM RM RM RM RM Revenue External sales - 90,252,331 32, ,284,631 Inter-segment sales ,000 - (204,000) ,252, ,300 - (204,000) 90,284,631 Segment results (external) (1,284,811) 8,191,481 (80,004) (167,199) - 6,659,467 Finance cost (1,073,735) Share of results in jointly controlled entity - (1,397) (1,397) Profit before tax 5,584,335 Tax expense (594,540) Net profit for the financial year 4,989,795 Other information Segment assets 1,333,957 53,588,253 6,340,359 1,030-61,263,599 Interest in jointly controlled entity - 2,513, ,513,447 Total assets 63,777,046 Segment liabilities 397,744 41,603,749 64, ,666-42,213,169 Unallocated liabilities 11,040,215 Total liabilities 53,253,384 Capital expenditure 195,000 1, ,280 Depreciation 127, ,728 36, ,144 Non-cash expenses other than depreciation - 925,499 16, ,444-1,090,443 No reporting by geographical segment is presented as the Group operates predominantly in Malaysia. Inter-segment pricing is determined under terms and conditions not materially different from transactions with unrelated parties.

75 notes to the financial statements 31 january FINANCIAL INSTRUMENTS (a) Interest rate risk The following tables set out the carrying amounts, the effective interest rates as at the balance sheet date and the remaining maturities of the Group s and the Company s financial instruments that are exposed to interest rate risk: Effective interest Within More than Group rate year years years years years 5 years Total As at 31 January 2007 % RM RM RM RM RM RM RM Fixed rates Hire-purchase creditors ,557 35,798 20,958 21,742 3, ,449 Floating rates Bank overdrafts ,786,287 1,814, ,600,287 Term loans ,659 59,701 65,011 70,792 77, ,866 1,527,117 MERGE ENERGY BHD X As at 31 January 2006 Fixed rates Hire-purchase creditors ,573 64,135 32,833 21,176 23,709 8, ,721 Floating rates Bank overdrafts ,101,837 2,000,000 2,564, ,665,837 Term loans , ,169 65,687 71,352 77, ,894 2,388,368 Company As at 31 January 2007 ANNUAL REPORT 2007 Fixed rates Hire-purchase creditors ,655 15, ,207 Floating rates Term loans , ,833 As at 31 January 2006 Fixed rates Hire-purchase creditors ,664 46,664 15, ,883 Floating rates Term loans , , ,228,876

76 74 notes to the financial statements 31 january FINANCIAL INSTRUMENTS (continued) (b) Credit risk The Group s historical experience in collection of trade receivables fall within the recorded allowances. Due to these factors, the Directors believe that no additional credit risk beyond amounts allowed for doubtful debts is inherent in the Group s trade receivables. ANNUAL REPORT 2007 MERGE ENERGY BHD X (c) The Group has no major concentration of credit risk that may arise from the exposure of a single receivable or a group of receivables. Fair values The carrying amounts of the financial instruments of the Group and the Company as at balance sheet date approximate their fair values except as set out below: As at 31 January 2007 Group Company Carrying Fair Carrying Fair amount value amount value RM RM RM RM Amounts owing by subsidiary companies - - 2,019,246 * Amount owing to a subsidiary company - - (3,974,732) * As at 31 January 2006 Amounts owing by subsidiary companies ,050 * Amount owing to a subsidiary company - - (167,139) * * It is not practical to estimate the fair value of amounts owing by/(to) subsidiary companies due principally to the lack of fixed repayment terms. However, the Company does not anticipate the carrying amounts recorded at the balance sheet date to be significantly different from the values that would eventually be received or settled. The following methods and assumptions are used to determine the fair values of the following classes of financial instruments: (i) The carrying amounts of the financial assets and liabilities maturing within 12 months approximate their fair values due to the relatively short term maturity of these financial instruments. (ii) The fair values of the borrowings are estimated by discounting future cash flows at the current market rate available for similar borrowings.

77 notes to the financial statements 31 january SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES There are no significant transactions with related parties other than directors remuneration disclosed in Note 28. The relationship between the Group and the related parties, other than those disclosed in the financial statements, are as follows: Identities of related parties Dato Muhammad Azaham Bin Abdul Wahab } Yusof Badawi } Maseri Bin Basirah } Dr Mohd Soib Bin Mustakim } Directors Sheah Kok Fah } Abd Latiff Bin Ahmad } Tahirruddin Bin Ahmad } Haji Mat Anuar Bin Hasan Relationship with the Group MERGE ENERGY BHD X Hew Thin Chay } Former Director 37. CONTINGENT LIABILITIES - UNSECURED Company RM RM Corporate guarantees given to licensed banks for banking and credit facilities granted to subsidiary companies 4,600,287 6,665,837 ANNUAL REPORT COMPARATIVE FIGURES Certain comparative figures in the financial statements have been reclassified in order to conform with current year s presentation as follows:- Balance sheet As previously Reclassi- As reported fication restated RM RM RM Property, plant and equipment 7,755,961 (4,793,387) 2,962,574 Investment properties 5,076,640 4,793,387 9,870, AUTHORISATION FOR ISSUE OF FINANCIAL STATEMENTS These financial statements were authorised for issue by the Board of Directors on 25 May 2007.

78 76 LIST OF PROPERTIES AS AT 31 JANUARY 2007 ANNUAL REPORT 2007 MERGE ENERGY BHD X Location Description (Existing Use) Tenure (Age of Building) Land Area (Built-Up Area) sq. ft. Net Book Value as at RM Date of Acquisition H.S. (D) 512/96 to 522/96, 17 units of Freehold 28,795 3,007, Lots 715 to 725, 2-storey (8 1 / 2 years) (36,788) H.S. (D) 524/96 to 526/96, shop house Lots 727 to 729, (rented/vacant) H.S. (D) 544/96 to 546/96, Lots 747 to 749, Sek 41, Mukim Kulim Daerah Kulim Kedah Darul Aman Lot 444, P.T and 2 1 / 2 - storey Leasehold 18, , Title No. H.S. (D) semi-detached Expiring on (5,400) Mukim Sungai Buloh factory Daerah Petaling (office) (9 years) Selangor Darul Ehsan Lot 449, P.T and 2 1 / 2 - storey Leasehold 17, , Title No. H.S. (D) semi-detached Expiring on (5,400) Mukim Sungai Buloh factory Daerah Petaling (office) (9 years) Selangor Darul Ehsan Lot 416, P.T and 3-storey Leasehold 23,153 1,900, Title No. H.S. (D) detached factory Expiring on (10,240) Mukim Sungai Buloh (rented) Daerah Petaling (9 years) Selangor Darul Ehsan Lot 097(C), P.T and 2-storey Leasehold 7, , Title No. H.S. (D) shop office Expiring on (3,610) Mukim Sungai Buloh (rented) Daerah Petaling (7 years) Selangor Darul Ehsan Lot 043(E), P.T and 3-storey Leasehold 2, , Title No. H.S. (M) 9741 shop office Expiring on (8,916) Mukim Sungai Buloh (vacant) Daerah Petaling (8 years) Selangor Darul Ehsan

79 list of properties as at 31 january Location Description (Existing Use) Tenure (Age of Building) Land Area (Built-Up Area) sq. ft. Net Book Value as at RM Date of Acquisition Lot 071(E), P.T and 3-storey Leasehold 2, , Title No. H.S. (M) 9713 shop office Expiring on (8,916) Mukim Sungai Buloh (vacant) Daerah Petaling (8 years) Selangor Darul Ehsan Lot 080, P.T and 4-storey Leasehold 1, , Title No. H.S. (D) shop office Expiring on (7,040) Mukim Sungai Buloh (rented/vacant) Daerah Petaling (2 1 / 2 years) Selangor Darul Ehsan MERGE ENERGY BHD X Lot 081, P.T and 4-storey Leasehold 1, , Title No. H.S. (D) shop office Expiring on (7,040) Mukim Sungai Buloh (rented/vacant) Daerah Petaling (2 1 / 2 years) Selangor Darul Ehsan ANNUAL REPORT 2007

80 78 ANALYSIS OF SHAREHOLDINGS AS AT 31 MAY 2007 Authorised share capital : RM100,000,000 Issued and paid-up share capital : RM67,000,000 Class of shares : Ordinary Nominal value : RM1.00 per share Voting rights : 1 vote per share ANNUAL REPORT 2007 MERGE ENERGY BHD X DIRECTORS SHAREHOLDINGS Name of Director Direct Interest Indirect Interest No. of Shares % No. of Shares % Dato Muhammad Azaham bin Abdul Wahab * ,000, Yusof Badawi * ,000, Haji Mat Anuar bin Hasan Dr Mohd Soib bin Mustakim 8,000, Sheah Kok Fah Abd Latiff bin Ahmad Tahirruddin bin Ahmad SUBSTANTIAL SHAREHOLDERS Name of Shareholder Direct Interest Indirect Interest No. of Shares % No. of Shares % Desa Binapuri Sdn Bhd 13,000, Dato Muhammad Azaham bin Abdul Wahab * ,000, Yusof Badawi * ,000, Jumat bin Salihen 10,015, Maseri bin Basirah 10,000, Dr Mohd Soib bin Mustakim 8,000, * Deemed interest by virtue of 50% equity interest in Desa Binapuri Sdn Bhd. DISTRIBUTION OF SHAREHOLDINGS Size of Holdings No. of Holders % No. of Shares % , , ,001-10, ,175, , , ,778, ,001-3,349,999 (less than 5% of issued shares) ,622, ,350,000 and above (5% and above of issued shares) ,000, Total 1, ,000,

81 analysis of shareholdings as at 31 may LARGEST SHAREHOLDERS No. Name of Shareholders No. of Shares % 1 Maseri bin Basirah 10,000, Desa Binapuri Sdn Bhd 10,000, Mohd Soib bin Mustakim 8,000, CIMB Group Nominees (Tempatan) Sdn Bhd [P/S for Jumat bin Salihen] 7,000, Zon bin Abdul Hamid 3,032, Jumat bin Salihen 3,015, CIMB Group Nominees (Tempatan) Sdn Bhd [P/S for Desa Binapuri Sdn Bhd] 3,000, Mohmad Damahuri bin Mohmad Tahir 2,723, Hamdan bin Mohamed 2,690, Zahidan bin Abdullah 1,500, Hiap Huat Realty Sdn Bhd 1,472, Solarcom Sdn Bhd 1,300, Woo Yew Lam 1,011, Nusmakmur Development Sdn Bhd 1,000, Tan Lean Choo 493, AIBB Nominees (Tempatan) Sdn Bhd [P/S for Southern Consolidated Projects Sdn Bhd] 470, Tan Huat Sheng 312, Goh Beng Ee 300, Lim Ah Lim Chor Kheng 291, Mayban Nominees (Tempatan) Sdn Bhd [P/S for Wong Wing Kheong] 245, Ang Swee Ang Swee Yong 237, Lim Boon Liat 220, Tan Hoi Chon 215, Amsec Nominees (Tempatan) Sdn Bhd [P/S for Lee Heng Choong] 194, Tan Yu Wei 185, Shin Kong Chin Kong Kew 177, Ang Seng Ong Seng Chew 160, Amsec Nominees (Tempatan) Sdn Bhd [P/S for Sabbir Husain bin Akbarali] 150, Tan Kim Siw 116, Lim Han Kong 108, MERGE ENERGY BHD X ANNUAL REPORT 2007 Total 59,622, Note: P/S means pledged securities account

82 80 NOTICE OF ANNUAL GENERAL MEETING NOTICE IS HEREBY GIVEN THAT the Tenth Annual General Meeting of Merge Energy Bhd. will be held at Putra Room, 1 st Floor, Kelab Golf Sultan Abdul Aziz Shah, No. 1 Rumah Kelab, Jalan Kelab Golf 13/6, Shah Alam, Selangor Darul Ehsan on Tuesday, 24 July 2007 at 10:00 a.m. for the following purposes: ANNUAL REPORT 2007 MERGE ENERGY BHD X AGENDA Ordinary Business 1. To receive the Audited Financial Statements for the financial year ended 31 January 2007 together with the Reports of the Directors and Auditors thereon. 2. To approve the payment of Directors fees for the financial year ended 31 January To re-elect the following Directors retiring pursuant to Article 105 of the Company s Articles of Association: (a) Encik Yusof Badawi (b) Mr Sheah Kok Fah. 4. To re-elect Haji Mat Anuar bin Hasan, who retires pursuant to Article 112 of the Company s Articles of Association. 5. To re-appoint Messrs BDO Binder as Auditors and to authorise the Directors to fix their remuneration. Special Business To consider and if thought fit, pass the following resolutions: Resolution 1 Resolution 2 Resolution 3 Resolution 4 Resolution 5 Resolution 6 6. Ordinary Resolution Authority to Issue Shares THAT pursuant to Section 132D of the Companies Act, 1965, the Directors be and are hereby empowered to issue shares in the Company at any time until the conclusion of the next Annual General Meeting or until the expiration of the period within which the next Annual General Meeting is required by law to be held, whichever is earlier and upon such terms and conditions and for such purposes as the Directors may in their absolute discretion deem fit, provided that the aggregate number of shares issued pursuant to this resolution does not exceed 10% of the issued share capital of the Company for the time being AND THAT the Directors be and are hereby also empowered to obtain the approval for the listing of and quotation for the additional shares so issued on Bursa Malaysia Securities Berhad. 7. Special Resolution Amendments to Articles of Association THAT the amendments to the Articles of Association of the Company as set out in Appendix A of this Annual Report be and are hereby approved. Resolution 7 Resolution 8 8. To transact any other business of which due notice shall have been given. By Order of the Board Yoong Wai Ling (MAICSA ) Company Secretary Shah Alam, Selangor Darul Ehsan 2 July 2007

83 notice of annual general meeting 81 Notes: 1. A member entitled to attend and vote at the Meeting is entitled to appoint a proxy to attend and vote in his stead. Where a member appoints more than one proxy, the appointment shall be invalid unless he specifies the proportions of his holdings to be represented by each proxy. A proxy need not be a member of the Company. 2. Where a member of the Company is an authorised nominee as defined under the Securities Industry (Central Depositories) Act 1991, it may appoint at least one proxy in respect of each securities account it holds with ordinary shares of the Company standing to the credit of the said securities account. 3. The instrument appointing a proxy shall be in writing under the hand of the appointer or his attorney duly authorised in writing or if such appointer is a corporation, under its Common Seal or the hand of its attorney. 4. The instrument appointing a proxy must be deposited at the registered office of the Company at No. 2 Jalan Apollo U5/190, Bandar Pinggiran Subang, Seksyen U5, Shah Alam, Selangor Darul Ehsan not less than 48 hours before the time appointed for holding the Meeting or any adjournment thereof. 5. Explanatory Notes on Resolution 7 The proposed resolution, if passed, is to authorise the Directors to allot up to 10% of the issued share capital for such purposes as the Directors consider would be in the best interests of the Company. This authority will, unless revoked or varied by the Company in a general meeting, expire at the conclusion of the next Annual General Meeting or will subsist until the expiration of the period within which the next Annual General Meeting is required by law to be held, whichever is earlier. 6. Explanatory Notes on Resolution 8 The proposed resolution, if passed, is to authorise the proposed amendments to the Articles of Association of the Company in compliance with the provisions of the Listing Requirements of Bursa Malaysia Securities Berhad. The proposed amendments are set out in Appendix A of this Annual Report. MERGE ENERGY BHD X ANNUAL REPORT 2007

84 82 APPENDIX A AMENDMENTS TO ARTICLES OF ASSOCIATION The proposed amendments to the Articles of Association of the Company are as follows: company in whose name the Deposited Security is registered. ANNUAL REPORT 2007 MERGE ENERGY BHD X 1. Article 2 : Definitions THAT Article 2 be amended in the following manner: (i) (ii) (iii) the existing definitions in Article 2(c), 2(i), 2(j), 2(l), 2(n) and 2(p) be deleted in its entirety and substituted with new definitions; the existing Article 2(d), 2(e), 2(f) and 2(g) be renumbered as Article 2(c), 2(d), 2(e) and 2(f); the existing Article 2(c) be renumbered as Article 2(g), AND THAT all references throughout the whole Articles of Association of the Company shall be amended accordingly. Existing Article 2 Article 2(c): Central Depository means Malaysian Central Depository Sdn Bhd. Article 2(i): Article 2(j): Article 2(l): the Exchange means Kuala Lumpur Stock Exchange. holder means, in relation to securities in the Company, any person/persons whose names appear on the Register and any Depositor whose names appear on the Record of Depositors but shall exclude the Central Depository or its nominee company in whose name the Deposited Security is registered. Holding of shares in the Company and shareholder of the Company and any other similar expressions shall have the corresponding meanings. member / members means any person/persons for the time being holding shares in the Company including Depositors whose names appear on the Record of Depositors but shall exclude the Central Depository or its nominee Article 2(n): Article 2(p): Record of Depositors means a record provided by the Central Depository to the Company or its registrar or its issuing house pursuant to an application under Chapter 24 of the Rules. Rules means the Rules of the Central Depository. Amended Article 2 Article 2(g): the Depository means Bursa Malaysia Depository Sdn Bhd (Company No W) including any further change to its name. Article 2(i): Article 2(j): Article 2(l): the Exchange means Bursa Malaysia Securities Ber had including any further change to its name and such other stock exchange if any, upon which the shares of the Company may be listed. holder means, in relation to securities in the Company, any person/persons whose names appear on the Register and any Depositor whose names appear on the Record of Depositors but shall exclude the Depository or its nominee company in whose name the Deposited Security is registered. Holding of shares in the Company and shareholder of the Company and any other similar expressions shall have the corresponding meanings. member/members means any person/persons for the time being holding shares in the Company including Depositors whose names appear on the Record of Depositors but shall exclude the Depository or its nominee company in whose name the Deposited Security is registered.

85 appendix A amendments to articles of association 83 Article 2(n): Article 2(p): Record of Depositors means a record provided by the Depository to the Company or its registrar or its issuing house pursuant to an application under Chapter 24 of the Rules. Rules means the Rules of the Depository. 2. Article 5 : How preference shares to be issued THAT Article 5(a) and 5(d) be deleted in its entirety and Article 5(b) and 5(c) be re-numbered as Article 5(a) and 5(b) respectively. Existing Article 5(a) and 5(d) Without prejudice to any special rights previously conferred on the holders of any share or class of shares already issued, but subject to the Act and these Articles any shares in the Company (whether forming part of the original capital or not) may be issued or have attached thereto such preferred, deferred or other special rights, or such restrictions, whether in regard to dividend, return of capital, voting or otherwise, as the Company may from time to time by ordinary resolution determine provided that:- (a) the total nominal value of preference shares issued shall not exceed the total nominal value of the issued ordinary shares at any time; (b) the company is exempted from compliance with section 14 of the Securities Industry (Central Depositories) Act 1991 or section 29 of the Securities Industry (Central Depositories) (Amendment) Act 1998, as the case may be, under the Rules of the Central Depository in respect of such securities, the company shall, upon request of a securities holder, permit a transmission of securities held by such securities holder from the register of holders maintained by the registrar of the company in the jurisdiction of the Approved Market Place (hereinafter referred to as "the Foreign Register"), to the register of holders maintained by the registrar of the company in Malaysia (hereinafter referred to as "the Malaysian Register") provided that there shall be no change in the ownership of such securities. (2) For the avoidance of doubt, no company which fulfils the requirements of subparagraphs (1)(a) and (b) above shall allow any transmission of securities from the Malaysian Register into the Foreign Register. Amended Article 54A Article 54A : Transmission of securities MERGE ENERGY BHD X ANNUAL REPORT 2007 (d) the holder of a preference share must be entitled to a return of capital in preference to holders of ordinary shares when the company is wound up. 3. Article 54A : Transmission of securities from Foreign Register THAT the sub-heading of Article 54A be amended by deleting the words "from Foreign Register" and the existing Article 54A be amended accordingly. Existing Article 54A (1) Where: (a) the securities of the company are listed on an Approved Market Place; and Where: (a) the securities of the Company are listed on another stock exchange; and (b) the Company is exempted from compliance with section 14 of the Central Depositories Act or section 29 of the Securities Industry (Central Depositories) (Amendment) Act 1998, as the case may be, under the Rules in respect of such securities, the Company shall, upon request of a securities holder, permit a transmission of securities held by such securities holder from the register of holders maintained by the registrar of the Company in the jurisdiction of the other stock exchange, to the register of holders maintained by the registrar

86 84 appendix A amendments to articles of association of the Company in Malaysia and vice versa provided that there shall be no change in the ownership of such securities. 4. Article 74A : Record of Depositors 7. Article 115 : Vacation of office of director (i) THAT the existing Article 115(e) and (f) be amended by inserting the words during his term of office. ANNUAL REPORT 2007 MERGE ENERGY BHD X THAT Article 74A(2) be amended by substituting the words a date with the latest date which is reasonably practicable which shall in any event be. Existing Article 74A(2) The Company shall also request the Central Depository in accordance with the Rules of the Central Depository; to issue a Record of Depositors, as at a date not less than 3 market days before the general meeting (hereinafter referred to as the General Meeting Record of Depositors ). Amended Article 74A(2) The Company shall also request the Depository in accordance with the Rules, to issue a Record of Depositors, as at the latest date which is reasonably practicable which shall in any event be not less than 3 market days before the general meeting (hereinafter referred to as the General Meeting Record of Depositors ). 5. Article 98A : Appointment of more than one proxy THAT the sub-heading of Article 98A be amended by substituting the words more than with at least AND THAT the new sub-heading of Article 98A shall read as follows: Existing Article 115(e) and (f) The office of director shall, ipso facto, be vacated: (e) (f) if he becomes of unsound mind or a person whose person or estate is liable to be dealt with in any way under the law relating to mental disorder; if he has a Receiving Order in Bankruptcy made against him or makes any arrangement or composition with his creditors generally; Amended Article 115(e) and (f) The office of director shall, ipso facto, be vacated: (e) (f) (ii) if he becomes of unsound mind or a person whose person or estate is liable to be dealt with in any way under the law relating to mental disorder during his term of office; if he has a Receiving Order in Bankruptcy made against him or makes any arrangement or composition with his creditors generally during his term of office; THAT the existing Article 115(h) be deleted in its entirety. Article 98A : Appointment of at least one proxy 6. Article 102 : Directors Existing Article 115(h) The office of director shall, ipso facto, be vacated: THAT Article 102 be deleted in its entirety and Article 103 to Article 188 be re-numbered as Article 102 to Article 188 respectively. Existing Article 102 All directors of the Company shall be natural persons. (h) if he is absent from more than 50% of the total board of directors meetings held during a financial year.